Unemployment rises to higher than expected 5.1%, Wall Street plunges again

The recent sharemarket volatility is set to continue after official figures showed the unemployment rate rose to a higher than expected 5.1% in July as 22,000 full-time jobs were slashed from the economy.

The result comes after another shocking night on Wall Street, where the Dow Jones Industrial Average plummeted another 519 points or 4.62% to 10,719.94.

The result is a far cry from the previous day, where investors became more confident after the Federal Reserve indicated it may take action to keep the economy purring, including keeping interest rates low through 2013.

But the negative performance came after bankers targeted France as the next likely economy to lose its AAA credit rating, despite Standard & Poor’s issuing a statement saying the rating was safe.

The disappointing result comes as the Australian sharemarket has fallen over 1% this morning, erasing any hopes of yesterday’s rally sustaining through the week, after the Dow Jones index plummeted more than 500 points overnight.

However, the market has recovered this morning. The benchmark S&P/ASX200 index was down 0.07% or just two points to 4138.5 at 11.50 AEST

The new unemployment figures are sure to impact on consumer confidence, which is already at a two-year-low. Westpac, which releases the Consumer Sentiment Survey, believes unemployment will rise to 5.5% by mid-2012 as consumers stop spending.

The new figures show the seasonally adjusted unemployment rate rose to 5.1% from 4.9%, as full-time jobs fell by 22,000. However, this was partly offset by a 22,100 rise in part-time jobs.

The result comes after Commonwealth Bank chief executive Ralph Norris said yesterday that rising unemployment would present a threat to the economy and could result in increasing bad debts. Some property experts have also warned first-home buyers are more likely to default if unemployment rises.

Rismark International managing director Chris Joye says a lot of pressure has now been relieved from the Reserve Bank regarding interest rate hikes, arguing that the lower dollar and likely cuts from the major banks will achieve the same result as a cut to rates.

“Many will argue that official RBA rates should be going down, while the more sensible heads will probably conclude that the RBA can wait until the next inflation print in late October.”

“Great news for all borrowers and the housing market especially, which is the most interest rate sensitive sector of the economy.”

Economists and bankers suggest the volatility may last for some time with France likely to be the next major economy suffering a credit downgrade due to its overwhelming debt.

Commonwealth Bank chief executive Ralph Norris said yesterday during the bank’s financial results that investors should “not be surprised that as we progress down the next few years that there won’t be more sorts of volatile situations… as had occurred in the last week or so, or last several months”.

“In Europe in particular, this is going to be a many-year workout… I don’t think the global financial crisis is actually finished.”

Australian Securities Exchange chairman David Gonski also said yesterday at an Australia Israel Chamber of Commerce meeting that Tuesday’s trading session was “a very historic day”.

“The world clearly has many problems and obviously people react at different times. You have different reactions and that’s what happens on a market, and that’s what has happened.”

BlueScope Steel chairman Graham Kraehe has also made the comment that he views the recovery as not “a three to six month exercise… it will be a progressive improvement over at least a couple of years.”

That view has been confirmed by Future Fund chairman David Murray.

“The global financial crisis was caused by excessive debt that has built up both at the government level and in the private sector in developed countries,” he said yesterday.

“The sorting out of that is probably something that could take up to 20 years.”