Job cuts to push unemployment higher, economists tip RBA rate cuts to lift confidence

Economists say unemployment will continue to rise this year as businesses add to the job cuts yesterday by Westpac and Holden, with many suggesting the Reserve Bank will need to continue to cut rates in order to avoid the panic spreading to other parts of the economy.

But economists have also made it clear that the labour situation is clearly different than during the global financial crisis and the jobless rate will remain near historical lows.

“The sectors that are weak right now are those that are the biggest employment sectors – manufacturing, retail and construction. And these are going through some structural changes,” ANZ economist Ivan Colhoun told SmartCompany this morning,

“However, if you look at the long-term average the labour market is essentially flat over the past year. Transport is quite strong, and banking and finance are about average. Recreation and personal activities are above average.”

The comments come as reports suggest Westpac is preparing to slash between 300 and 400 jobs. Earlier this week over 300 jobs were lost in the manufacturing sector as well.

Forecasters including CommSec and Westpac expect the jobless rate to move up towards 6% over the course of this year. ANZ’s Colhoun believes it will increase to around 5.5%, but AMP senior economist Shane Oliver believes the 6% rate is more realistic.

“I’ve been of that view for awhile, that the layoffs and other job market indicators we’re seeing are consistent with that.”

However, Oliver and Colhoun says there is some relief, as low inflation data will allow the RBA to cut interest rates and keep the unemployment rate somewhat steady over 2012.

“The danger here is that these things gain a momentum of their own,” Oliver says. “People lose jobs, which cripples household budgets, which leads to more layoffs.”

“It is critical the Reserve Bank acts as a circuit breaker here and gives relief in the form of rate cuts. If we get more rate cuts, one next week and another in in March, then I’d be reasonably confident.”

Colhoun says there is also reason to be confident about certain sectors of the economy, as this will keep overall unemployment in check. Mining, he says, has been hiring more and more over the past six months.

“The thing that’s different now is that in the financial crisis employment absolutely collapsed. But we believe it’ll just drift up a little towards 5.5% over the next six months.”

“The best thing is that the Reserve Bank is going to look at unemployment now that inflation is in check. They will cut rates… if they need to.”

Colhoun says it would also be appropriate to look at business conditions, which have remained average overall.

“If you look at something like the NAB business conditions surveys, overall, conditions are average, although no industry is at its average. So you have some sectors holding up others.”