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David Uren and Lenore Taylor June 13, 2008
THE longest run of sustained employment growth in more than three decades has come to an end with the loss of 20,000 jobs last month.
Raising the spectre of a repeat of the "stagflation", a combination of high inflation and low growth that occurred in the 1970s, the fall in jobs was accompanied by the release of a survey showing that consumers expected prices would soar by an average of 5.9 per cent over the next year.
The Melbourne Institute survey, sponsored by the Reserve Bank, shows that only 8 per cent of consumers believe the bank will succeed in getting inflation back into its target 2 to 3 per cent band in that time.
The fall in the number of jobs surprised financial markets and sent the value of the Australian dollar tumbling from US94.6c to US93.7c.
Futures markets, which on Wednesday were confidently forecasting another two rate rises by the end of the year, now expect there will only be one.
The unemployment rate remained steady at 4.3 per cent only because the fall in jobs was matched by the number of people deciding it was no longer worth looking for work.
Acting Treasurer Lindsay Tanner said there was no room for complacency in the Government's "war" against inflation despite some signs of a slowing economy, including lower employment, a slump in consumer sentiment, lower levels of lending and slower retail sales.
"The economy is running at close to full capacity and the terms of trade continue to improve, largely because of the effect of higher commodity prices, and the global pressure from food and energy prices continues, so it is absolutely critical for us to keep government spending under control," Mr Tanner said.
Economists who, like financial markets, were taken by surprise by the drop in employment, cautioned that, as a result of the Government's anti-inflationary budget cuts, the Australian Bureau of Statistics labour force survey had become less reliable.
The job losses were almost entirely caused by a reduction in the employment of women, and were concentrated in NSW.
This suggests it might bounce back next month.
However, the fall is consistent with weaker business confidence, and declining consumer demand.
The Australian Chamber of Commerce and Industry's director of industry policy, Greg Evans, said the labour force figures confirmed the slowing of the domestic economy and the effect of both official and unofficial interest increases.
"This should give the Reserve Bank further confirmation that it is on track in dealing with inflation," he said. However, the blowout in inflationary expectations is likely to rattle the Reserve Bank.
The minutes of the last bank board meeting said the prospect of inflation remaining above 4 per cent throughout this year "carried the risk that expectations of high ongoing inflation could develop, which could in turn affect price- and wage-setting behaviour".
Economists said that although it was possible that high inflation and low growth could persist, it was unlikely that either Australia or the world economy would repeat the experience of the 1970s, when both unemployment and inflation soared.
Access Economics director Chris Richardson said that in the 1970s, the "misery index" compiled by combining unemployment and inflation rates reached 20 per cent.
Today, with both inflation and unemployment at about 4 per cent, it was less than half that rate.
"Things may not be as good as they were, but they are a long way from the 70s," Mr Richardson said.
THE longest run of sustained employment growth in more than three decades has come to an end with the loss of 20,000 jobs last month.
Raising the spectre of a repeat of the "stagflation", a combination of high inflation and low growth that occurred in the 1970s, the fall in jobs was accompanied by the release of a survey showing that consumers expected prices would soar by an average of 5.9 per cent over the next year.
The Melbourne Institute survey, sponsored by the Reserve Bank, shows that only 8 per cent of consumers believe the bank will succeed in getting inflation back into its target 2 to 3 per cent band in that time.
The fall in the number of jobs surprised financial markets and sent the value of the Australian dollar tumbling from US94.6c to US93.7c.
Futures markets, which on Wednesday were confidently forecasting another two rate rises by the end of the year, now expect there will only be one.
The unemployment rate remained steady at 4.3 per cent only because the fall in jobs was matched by the number of people deciding it was no longer worth looking for work.
Acting Treasurer Lindsay Tanner said there was no room for complacency in the Government's "war" against inflation despite some signs of a slowing economy, including lower employment, a slump in consumer sentiment, lower levels of lending and slower retail sales.
"The economy is running at close to full capacity and the terms of trade continue to improve, largely because of the effect of higher commodity prices, and the global pressure from food and energy prices continues, so it is absolutely critical for us to keep government spending under control," Mr Tanner said.
Economists who, like financial markets, were taken by surprise by the drop in employment, cautioned that, as a result of the Government's anti-inflationary budget cuts, the Australian Bureau of Statistics labour force survey had become less reliable.
The job losses were almost entirely caused by a reduction in the employment of women, and were concentrated in NSW.
This suggests it might bounce back next month.
However, the fall is consistent with weaker business confidence, and declining consumer demand.
The Australian Chamber of Commerce and Industry's director of industry policy, Greg Evans, said the labour force figures confirmed the slowing of the domestic economy and the effect of both official and unofficial interest increases.
"This should give the Reserve Bank further confirmation that it is on track in dealing with inflation," he said. However, the blowout in inflationary expectations is likely to rattle the Reserve Bank.
The minutes of the last bank board meeting said the prospect of inflation remaining above 4 per cent throughout this year "carried the risk that expectations of high ongoing inflation could develop, which could in turn affect price- and wage-setting behaviour".
Economists said that although it was possible that high inflation and low growth could persist, it was unlikely that either Australia or the world economy would repeat the experience of the 1970s, when both unemployment and inflation soared.
Access Economics director Chris Richardson said that in the 1970s, the "misery index" compiled by combining unemployment and inflation rates reached 20 per cent.
Today, with both inflation and unemployment at about 4 per cent, it was less than half that rate.
"Things may not be as good as they were, but they are a long way from the 70s," Mr Richardson said.
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