The Reserve Bank is warning it may become harder to predict where Australia’s labour market is headed because of the way the economy is evolving.
It also believes inflation will remain stubbornly below 2% until the end of 2018, with economy-wide prices unlikely to rise for years.
Minutes released from the RBA’s board meeting in August show the central bank thinks it may be more difficult to forecast employment growth in coming years because the economy will be growing in areas that do not boost jobs.
It says liquefied natural gas production is going to start making a “significant contribution” to output growth shortly, but LNG production is less labour intensive than other industries.
The past relationship between growth in GDP and employment “might be less useful as a guide for forecasting labour market conditions” over coming years, it warns.
It also predicts the unemployment rate may drop slightly before then, from 5.7% to about 5.5%, but that means there will be “ongoing spare capacity” in the labour market for years.
Australia’s unemployment rate has not fallen below 5.7% since April 2013.
The RBA has already warned, in its recent statement on monetary policy, that underemployment is a concern in Australia.
Economists say further rate cuts are now on the cards, despite a record-low cash rate of 1.5%.
“This should see the market focus even more closely on trends in the unemployment rate over coming months and indeed it is NAB’s expectation that slower economic growth in 2018 – as residential housing growth slows – will drive further [interest rate cuts] in mid-2017 to prevent the unemployment rate from rising in 2018,” NAB’s chief economist, Ivan Colhoun, said.
Westpac economist Matthew Hassan said he expected the RBA was erring on the side of cutting rates again, but it would want to see what effect its recent cut would have on the economy before doing so again.
“We continue to view the Reserve Bank as carrying an easing bias – implicit in its inflation forecasts and in our view in much of its rhetoric,” Hassan said.
“However, we expect that downside risks around economic conditions will diminish sufficiently in coming months to see the bank retain a more patient approach to its inflation objective.”
The RBA’s warning about LNG-led economic growth came on the same day BHP Billiton reported a full year loss of $8.29bn as heavy writedowns and significantly weaker commodities prices hurt its bottom line.
The company said it lost US$10.7bn this year on account of weaker commodity prices.
The RBA governor, Glenn Stevens, will chair his final board meeting on 6 September. His successor will be deputy governor Philip Lowe.
