A more dovish RBA, lower unemployment and the rise of the Care Economy

It has been an eventful week. On Tuesday, the RBA board surprised no-one by leaving the cash rate target unchanged at 4.35 per cent for a ninth consecutive meeting. It turns out that all the ink (digital and otherwise) that has been spilled analysing the thinking at Martin Place this year could have been summarised in just one short sentence: the RBA left the cash rate target unchanged in 2024.

That said, there was some significant news to be found in the statement and press conference that accompanied December’s Board meeting. In the aftermath of last week’s weak GDP reading, the Board sounded rather more dovish than it had after previous meetings. With the economy stuck in a per capita recession and private sector activity stagnating, Australia’s central bank finally effectively admitted that the next move in the cash rate would be down - by omitting the phrase that it was ‘not ruling anything in or out’. It also sounded somewhat more open-minded on the timing of any move, prompting financial markets to reconsider the chance of a February 2025 rate cut after having recently all but ruled it out.

Then on Thursday, the picture changed again following the release of the November 2024 Labour Force numbers. Market economists had expected this would reveal a modest gain in employment (of around 25,000) and a tick up in the unemployment rate from 4.1 to 4.2 per cent. Instead, employment rose by a larger-than-expected 36,500, while the unemployment rate fell to 3.9 per cent. Australia’s unemployment rate now has a ‘three’ in front of it again for the first time since March this year.

Since the RBA had repeatedly said before this latest move that it judged that labour market conditions were too tight to be consistent with ‘full employment’ and a sustainable return of inflation to target, financial market pricing for the chances of an early 2025 rate cut abruptly changed direction again. Such is the volatility of market expectations in a data-dependent monetary policy environment.

More fundamentally, all this is also indicative of a complex macroeconomic environment. On the one hand, private sector activity indicators are weak, inflation has been tracking downwards and inflationary expectations have remained ‘well-anchored’. On the other hand, the labour market is still tight (and just got tighter), and the RBA’s forecasters think inflation will only return sustainably to target by 2026. We haven’t mentioned the RBA’s famous ‘narrow path’ for a while now, but that metaphor remains appropriate.

There are several considerations here. First, the labour market is typically a lagging indicator. If the RBA were to wait until unemployment was rising significantly, it would have left policy adjustment too late. Second, while the RBA’s forecasts imply that ‘full employment’ requires an unemployment rate of around 4.5 per cent, recent labour market readings suggest that the sustainable unemployment rate might well be lower than this. And third, there is ongoing debate as to how much the surprising resilience of Australia’s labour market in the face of weak private sector demand reflects underlying structural changes in the economy, including the changing balance of the public and private sector and of the market and non-market sector.

In this week’s note, we dive deeper into the labour market result, analyse messaging from the RBA board meeting and put some numbers around that structural change argument. Plus, there is the usual round-up of the week’s data releases and the regular selection of further reading and listening.

Finally, this is the last weekly economic update for this year. As usual, we will return in early February. We’ll also kick the year off on Wednesday, 5 February with an economics webinar on Forces and Megatrends Shaping the Australian and Global Economies in 2025. I will be joined by my former Lowy Institute colleague and now CEO Asia Society Australia, Anthony Bubalo for this one, as we examine the big geoeconomic and geopolitical themes we think will influence the coming year. I hope you can join us.

In this week’s Dismal Science podcast, also the last for this year, we explore whether a February rate cut is back on the table and we look back at my predictions from a year ago, revisiting forecasts for inflation, unemployment and economic growth.

It just remains for me to thank you all for your readership through 2024, as well as for all the comments, questions, and feedback you have kindly provided. And to pay tribute to all my colleagues who work so hard every Friday to get the weekly note out to everyone.

I wish you and yours a peaceful and restful holiday season. See you in 2025.

Australia’s unemployment rate has a ‘three’ in front of it again

The ABS said the unemployment rate fell to 3.9 per cent (seasonally adjusted) in November 2024, down from 4.1 per cent in October as the number of unemployed people dropped by 3,900 over the month. The consensus market forecast had expected the unemployment rate to increase to 4.2 per cent last month. Instead, it is back down to its lowest rate since March this year. On a trend basis, meanwhile, the unemployment rate was unchanged at four per cent.

The underemployment rate also fell in November, easing down to 6.1 per cent from 6.2 per cent in October (seasonally adjusted). That is the lowest underemployment rate recorded since April 2023. As a result, the overall underutilisation rate dropped from 10.3 per cent in October to 10 per cent in November – a rate last seen in September 2023.

Employment growth also surprised to the upside last month. Total employment rose by a strong 35,600 people (up 0.2 per cent) compared to the median market forecast of a softer 25,000 gain. Full-time employment rose by 52,600 people, more than offsetting a 17,000 fall in part-time work. The Bureau noted that November saw a higher than usual number of people moving into employment who had been unemployed and were waiting to start work.

The employment to population ratio rose from 64.3 per cent in October to 64.4 per cent in November, while the participation rate eased from September’s record 67.1 per cent rate to 67 per cent over the same period. Both remain elevated compared to pre-pandemic conditions.

Monthly hours worked were almost unchanged over November, down only marginally on the September result. This was the first time in six months that hours worked have not tracked employment growth.

RBA sounding more dovish

At the last Reserve Bank Board meeting of the year, the Board decided to leave the cash rate target unchanged at 4.35 per cent. That means that Australia’s central bank has now been on hold for nine consecutive meetings. The last time it changed, the cash rate target was back in November 2023, when it delivered a 25bp rate increase. With inflation easing over this period, the ex post real interest rate has been rising over time.

As has been the case for much of this year, RBA watchers were not expecting anything different this week. Instead, once again all the attention was on whether Martin Place would signal anything about its future intentions. And this month the accompanying statement sounded notably more dovish than its predecessors.

First, there was this key judgement:

‘The most recent forecasts published in the November Statement on Monetary Policy (SMP) do not see inflation returning sustainably to the midpoint of the target until 2026. The Board is gaining some confidence that inflationary pressures are declining in line with these recent forecasts, but risks remain.’ [emphasis added]

Second, it acknowledged that the recent run of activity data has been softer than the RBA expected at the time of the November 2024 Statement on Monetary Policy (SMP). In particular, it highlighted subdued output growth reported by last week’s national accounts, showing that the annual rate of GDP growth had slowed to the weakest since the early 1990s, except for during the COVID-19 pandemic. Similarly, the statement noted that September quarter data suggested that household incomes and household consumption had both recovered more slowly than the RBA had anticipated and that there was some risk that any future recovery in consumption would likewise be weaker than projected. (It noted, however – as we have too – that since then there have been stronger consumption results in October and November).

Third, the statement noted that wage pressures had likewise eased more than anticipated in the November 2024 SMP, although it also added that labour productivity growth remained weak.

Finally, the Board also omitted the key line that it was ‘not ruling anything in or out’ (which has appeared in previous statements). This implicitly acknowledges that – on the current economic trajectory – the next move in the cash rate is now far more likely to be down than up.

Governor Bullock’s press conference following the Board meeting then reinforced this shift to a more dovish tone in at least two important ways.

First, when asked about the change in language in the statement, she stressed it was deliberate and designed to signal both that some of the economic data seen since the November meeting had been softer than Martin Place had expected and that the Board’s views were evolving in line with this.

Next, when quizzed about the ‘requirement’ for at least two quarters of good inflation readings as a precondition for a rate cut that had appeared in the Minutes of the November 2024 Meeting, she explained this was a misinterpretation of what had been said. The point was rather that just one good CPI result on its own would not be enough, but that the RBA would be able to take other factors (the labour market, consumer spending) into account. Readers may recall that I made this point at the time.

Markets reacted to this messaging by bringing forward their best guess as to the timing of a first rate cut next year. Which suggests that – despite all my wavering over the past couple of months – that the call for a February 2025 rate cut still has some life in it after all. Although as already noted above, this week’s labour market release – published after the Board meeting had concluded – has since dampened some of the initial swing in market sentiment towards an earlier rate move.

Structural change, the public sector and the rise of the Care economy

Finally, a look at longer term shifts in the Australian economy.

As highlighted in last week’s note, one key theme of the September quarter 2024 national accounts was the stagnation in private sector activity and the reliance on public sector final demand to drive economic growth. Public final demand reached a record high of 28 per cent of real GDP in the third quarter of this year. That was up 3.5 percentage points relative to the pre-pandemic December quarter 2019 and about five percentage points higher than its average share over the five years from 2015 to 2019.

Of that total, general government (national, state, and local) consumption stood at 22.4 per cent of GDP, about 2.7 percentage points greater than in the December quarter 2019 and four percentage points above the 2015-19 average. And total public sector (national, state, and local government plus public corporations) investment was 5.6 per cent of GDP, up 0.7 percentage points of GDP relative to the December quarter 2019 and one percentage point above the 2015-19 average.

The same national accounts data also provided an update on the structure of Australian gross value added by industry. Here, recent attention has focused on the non-market sector, defined as the combined output of the Public administration and safety, Education and training and Health care and social assistance industries. As at the September quarter of this year, the non-market sector accounted for about 17.4 per cent of GDP. That was up 1.2 percentage points of GDP from the December quarter 2019 and 1.9 percentages points higher than the 2015-19 average. A closer look at the numbers here shows that much of this expansion has been accounted for by the Health care and social assistance industry. It alone accounted for 7.8 per cent of GDP last quarter, up 0.8 percentage points from the December quarter 2019 and 1.5 percentage points from its 2015-19 average. Public administration and safety provided a supporting role - accounting for 5.1 per cent of GDP and up 0.3 and 0.4 percentage points respectively. In contrast, Education and training (4.6 per cent of GDP in the September quarter 2024) was little changed as a share of GDP relative to pre-pandemic levels.

More evidence of related structural change in the economy can be found in the labour account data released by the ABS last week (some additional aspects of this release are also discussed in the data roundup below). According to these numbers, the public sector’s share of total filled jobs in the Australian economy had risen to 15.1 per cent of the total by the September quarter 2024. While that share was up 0.6 percentage points from the December quarter 2019, it was only 0.1 percentage points higher than the 2015-2019 average. Turn to the non-market sector, however, and the data show that the combined share of filled jobs accounted for by the three non-market industries was 29.9 per cent last quarter. That was up 3.8 percentage points from the December quarter 2019 and 4.2 percentage points from the 2015-19 average. Of total non-market sector jobs, 55 per cent were accounted for by the private sector and 45 per cent by the public sector.

Within the non-market sector (and across the economy overall) the biggest increase in filled jobs has taken place in the Health care and social assistance industry. This covers a range of services including hospitals, general and specialist medical services, pathology and diagnostic imaging services, dental and related care, ambulance services, childcare and aged and residential care. All up, 16.5 per cent of all filled jobs last quarter were found in this industry, which at 2.6 million filled jobs accounted for one million more jobs than the retail industry, Australia’s second-largest employer.

The share of filled jobs accounted for by the Health care and social assistance industry has risen by 3.3 percentage points since the December quarter 2019 and by four percentage points relative to the 2015-19 average. Note that most of that increase has taken place within the private sector (although note some of these roles will still be funded by public money), which accounted for 2.9 percentage points of the rise in the industry’s total increase in the share of filled jobs since the December 2019 quarter and 3.5 percentages points of the gain since 2015-19.

In summary, since the pandemic government spending in general and government consumption in particular has become a significantly larger part of the Australian economy. At the same time, the non-market share of the economy has also risen, led by the Health care and social assistance sector, with a supporting role for Public administration and safety. Finally, in terms of the structure of employment, there has been a significant increase in the employment share of the non-market sector in general and of the Health care and social assistance industry in particular. Within that sector, much of the increase in filled jobs has formally taken place within the private – not public – sector.

What does all this mean? In the short term, the relative expansion of the public sector is partly a story about the cyclical state of the economy. As private sector activity in the market sector has been squeezed by the RBA’s tight monetary policy, the public sector has kept the economy growing (just).

But it is also about structural change. There has been a shift in the balance of the economy towards the public sector and towards the (public and private) non-market sector. Some of this reflects increases in Commonwealth and state government spending on public infrastructure investment, including on renewables. Some of it reflects increased defence expenditure (which shows up as both consumption – think spending on wages and salaries as well as on consumables such as boots, petrol, and bullets – and some as investment – think purchases of durable military assets such as ships and aircraft). But much of it reflects the expansion of the so-called Care Economy across both the public and private sectors, and in particular the expansion of the Health care and social assistance industry both as a share of gross value added and as a share of employment. This in turn reflects two further changes underway in the economy.

First, the female participation rate has increased over the post-pandemic period. As of November this year, the female participation rate stood at 62.9 per cent, just below the record high of 63.2 per cent set earlier this year. That is up 1.9 percentage points from its pre-pandemic level of 61 per cent in December 2019 and up three percentage points from the 2015-2019 average. This increase in participation seems likely to have led to an increase in demand for childcare services (ABS survey data says that the main reason that women who wanted a job are unable to work is ‘caring for children’.)

Second, Australia’s population has continued to age over the post-pandemic period. There were around four million Australians aged 65 or over as of June 2019 on the eve of the pandemic, and around 508,000 aged over 85. By June 2024, those numbers had risen to more than 4.7 million and more than 581,000, respectively. This older population requires more health care and more aged care services. And with population ageing projected to continue, these demands are set to grow.

Finally, a third important factor here is the launch and subsequent rapid growth of the NDIS. The number of active participants (those determined eligible and with an approved plan) in the scheme at 30 June 2024 was 661,267. That was up from about 184,000 participants with an approved plan at 30 June 2019.

What else happened on the Australian data front this week?

The ABS said Australia’s population rose by 2.1 per cent over the year to 27.2 million people as of 30 June 2024. Of the total annual increase of 552,000 people, natural increase accounted for 106,400, while net overseas migration added an additional 445,600. The latter has fallen from a peak of more than 555,000 in the September quarter 2023.

The NAB Business Survey for November 2024 reported that activity weakened across last month. Business Conditions fell five points to an index level of +2 index points. By subcomponent, trading conditions led the decline, falling by eight points. There was also a six-point decline for profitability and a more modest one-point decline for employment. All three measures are now at or below their series average. At the same time, Business Confidence dropped by eight points to -3 index points and is now back in negative territory and below the series average. Forward orders also fell from -3 to -5 index points, although the capacity utilisation rate was unchanged at 82.4 per cent. Cost measures were little changed in November. Growth in both labour costs (a 1.4 per cent quarterly rate of increase) and final product prices (up 0.6 per cent) was unchanged from the October survey, while the rate of increase in purchase costs increased from 0.9 per cent to 1.1 per cent, even as the survey measure of retail price growth eased from 1.1 per cent to 0.6 per cent.

The ABS Monthly Business Turnover Indicator reported a 0.6 per cent monthly fall (seasonally adjusted) in the 13-industry aggregate in October 2024. Turnover was also down 0.3 per cent in annual terms. Seven of the 13 industries reported a monthly decline in turnover, led by the Electricity, gas, water and waste services industry (down 10.3 per cent – due in part to lower prices and abundant renewable energy supply in the electricity supply sector), followed by Transport, postal and warehousing (down 3.1 per cent). In annual terms, 10 of the 13 industries recorded increases in turnover, led by Arts and recreation services (up 10.3 per cent) and Construction (up 8.1 per cent).

The ANZ-Roy Morgan Consumer Confidence Index fell 2.9 points to a reading of 85.5 index points for the week ending 8 December 2024. The decline followed last week’s soft GDP numbers and the end of the Black Friday/Cyber Monday sales. All five subindices fell over the week, with the largest declines recorded for ‘future financial conditions’ (down 5.4 points) and ‘current financial conditions’ (down 3.9 points). After falling by 0.2 percentage points over the previous week, weekly inflation expectations fell another 0.3 percentage points to 4.5 per cent. ANZ noted that inflation expectations have not been below 4.5 per cent since August 2021.

The ABS reported there were 677,410 short-term visitor arrivals in October this year, an increase of 11.4 per cent on October 2023. Total arrivals were 1,939,260, an increase of 12.1 per cent over the year.

The ABS’s latest Characteristics of Employment provides data on working arrangements, employee earnings, trade union membership and labour hire workers. In terms of working arrangements, as of August 2024, 2.6 million employees (22 per cent of all employees and 18 per cent of all employed) did not enjoy paid leave entitlements, 20 per cent considered their job to be causal, 4.2 per cent were employed on a fixed term contract, 18 per cent did not have guaranteed minimum hours and 56 per cent were entitled to employer provided paid parental leave. In the same month, 36 per cent of employed people usually worked from home. That compares to around 20-30 per cent WFH rates between 1989 and 2009, and rates of 40 per cent in 2020 and 2021 during the pandemic.

The median employee earnings in main job were $1,396/week in August 2024, up $96 or 7.4 per cent from August 2023. For full-time employees, median weekly earnings were $1,700/week (up $100 or 6.3 per cent over the year). The median hourly earnings in main jobs were $40/hour, up $0.30 or just 0.7 per cent from August 2023.

In the case of trade union membership, 1.6 million or 13.1 per cent of employees were members in their main job, up from 12.5 per cent in August 2022. That marks the first increase since 2011 but still leaves the figure well down on the 40 per cent rate of 1992. Union membership is slightly more common amongst women (14 per cent) than men (12 per cent). By industry, the Education and training industry (27 per cent) and Public Administration and Safety and Health Care and social assistance (both 23 per cent) had the highest rates of union membership. By occupation, membership is highest among Professionals (almost 20 per cent) followed by Community and personal service workers (16 per cent).

Finally, the ABS says that in June 2024, 416,500 people or 2.8 per cent of all people had a job in Labour supply services. Over the past 10 years, employment in the Labour supply services industry has risen from two to 2.8 per cent of total employment.

According to the Bureau, there were 63 industrial disputes in the September quarter 2024, involving 33,000 employees and 46,600 lost working days. Across the year to the September quarter there were 200 disputes and 129,500 working days lost. That compares to 211 disputes and 76,100 lost days in the year to the September quarter 2023.

Last Friday, the ABS published the Labour Account for the September quarter 2024. Total jobs increased by 244,700 or 1.5 per cent over the quarter (seasonally adjusted) to 16.3 million. Filled jobs rose by 257,100 or 1.6 per cent to 16 million. The number of vacant jobs fell by 12,400 and the share of vacant jobs dropped to 2.1 per cent from 2.2 per cent in the June quarter. The vacancy rate has now fallen a full percentage point from its high of 3.1 per cent in mid-2022, although it remains above its pre-pandemic December quarter 2019 rate of 1.6 per cent. Employment in Health care and social assistance (up 109,700) and in Professional, scientific, and technical services (up 30,600) drove the rise in filled job numbers. According to the ABS, filled jobs in the former industry now stand at 2.6 million. Health care and social assistance now accounts for roughly one in six of all filled jobs, up from just 1 in 12 in the September quarter 1994. As noted earlier, this increase reflects rising demand for childcare on the one hand (a product of the elevated participation rate) and increased demand from older Australians for residential and home-based care services on the other hand. Some 6.6 per cent of employed people were multiple job holders, with the Bureau noting that while the rate of multiple job-holding had remained relatively stable at between five and six per cent between 1995 and 2019, the multiple job-holding rate has risen since the pandemic, remaining at a record high of between 6.5 and 6.7 per cent since December 2022.

Other things to note . . .

• RBA Deputy Governor Andrew Hauser’s speech on The Ghost of Christmas Yet to Come. Hauser says macroeconomic implications for Australia from future international trade policies are uncertain. The worry, he explains, is that a tit-for-tat trade war between the United States, China and other countries could push down activity and push up prices, with accompanying falls in competition, productivity and innovation. But, he continues, in practice there are big uncertainties over the likely scale, scope and timing of trade policies. Plus uncertainty over the likely impact on an Australian economy for which the US is a relatively modest export market and which is shielded to some extent by the floating AUD, and which has limited participation in global supply chains; and over how tariffs will impact the balance between supply and demand. Other key uncertainties include the extent to which China is hurt by US policies and the nature of Beijing’s response, including the form and magnitude of any stimulus policies. All of which means that the ultimate impact on Australian inflation is ambiguous at this point.
• Related, a new Research Discussion Paper on how global shocks affect Australia. The authors found that over the 1990-2019 period, while global shocks had significant implications for the AUD and the cash rate, they had a smaller effect on economic variables like real GDP – suggesting that the exchange rate and monetary policy do work as effective international buffers.
• Also from the RBA: the December 2024 Chart Pack.
• Two contrasting views on interest rates from the AFR. In the first, Ross Garnaut argues that the RBA should have cut rates this week. In the second, Warren Hogan disagrees.
• Also from the AFR, Johnn Kehoe reckons Australia’s economic problems have been brewing for years.
• The CSIRO has released the GenCost 2024-25 draft report for consultation. Key points are that large scale solar photovoltaics (PV) capital costs have fallen eight per cent for two years in a row; large-scale battery costs saw capital costs fall 20 per cent; and onshore wind generation costs rose two per cent due to increases in equipment and installation costs. The report also includes detailed costings for new-build, large-scale nuclear energy generation in Australia and estimates total development lead time of at least 15 years, with generation costs well above that of firmed renewables.
• The PC’s submission on carbon leakage to the Department of Climate Change, Energy the Environment and Water’s Review focuses on the idea of an Australian border carbon adjustment (BCA) mechanism.
• The Economist magazine ranks the best performing OECD economies of this year. Spain takes the top spot. Australia comes in at 21, one place below the United States.
• The ADB’s latest Asian Development Outlook.
• Joseph Politano explains the US productivity boom. While productivity growth in most advanced economies (including here in Australia) has been dismal in recent years, the US economy has enjoyed a productivity boom and higher employment. Strikingly, that boom has been driven by the services sector. Politano traces much of the productivity story to job switching (as workers moved to higher paying, higher productivity jobs), a significant rise in new business creation and an increase in investment, particularly in high-tech productivity enhancing items like computers, software, and R&D – some of it propelled by the WFH wave.
• The OECD warns that adult literacy and numeracy skills have declined or stagnated across most member countries over the past decade.
• Some thinking about the nexus between carbon taxes, broader tax reform and climate dividends.
• The December 2024 edition of the BIS quarterly review includes a primer on large language models (LLMs) for economists, as well as a look at the different ways advanced economy central banks have responded to demand and supply shocks in recent decades.
• Two Big Reads from the FT, the first on historical traumas driving South Korea’s political turmoil and the second on Javier Milei’s first year as Argentina’s president.
• FT Alphaville presents a guide to 2025 investment outlooks by someone who hasn’t read them.
• The WSJ charts US-China trade and tariffs.
• Brad Setser asks, will China take over the global car industry?
• Two from Engelsberg ideas. First, lessons from how the print revolution created a market of ideas. Second, on the fragile equilibrium of technology, liberty and power.
• An attempt to assess the macroeconomic productivity gains from AI.
• From the These Times podcast, one episode on revolution in Syria and one on Europe’s Franco-German crisis.
• Related, the FTs Unhedged podcast asks, do geopolitics matter for markets?
• Martin Wolf interviews Larry Summers about Trump and the US economy. And Bloomberg’s Voternomics podcast discusses how markets might be wrong about Trump.