How high will the unemployment rate go? A SmartCompany Q&A

The latest employment data has been thoroughly picked apart by economists and commentators in the last 24 hours, and with good reason – the unemployment rate is perhaps the most important piece of economic data to watch in 2009.

The latest employment data has been thoroughly picked apart by economists and commentators in the last 24 hours, and with good reason – the unemployment rate is perhaps the most important piece of economic data to watch in 2009.

A spike in unemployment will have countless knock-on effects. Consumer spending will fall even further. Mortgagees will be forced to sell their homes, potentially flooding the housing market with stock and forcing down house prices. Government budgets will be thrown into defecit as politicians are forced to boost public spending to stimulate the economy.

In short, if unemployment remains in check, we can emerge from this downturn by the middle of the year. If unemployment spikes, we could be facing a deeper recession.

So how bad could the situation get? Time for a SmartCompany Q&A.

The employment data didn’t look too bad – total jobs only fell by 1200. What’s the big deal?

Certainly the headline employment data was better than expected, with the economy shedding a total of 1200 jobs, compared with forecasts of 20,000. The unemployment rate ticked up from 4.4% to 4.5%, which was expected. But…

I knew there was a but coming. What’s the bad news?

The fact that 43,900 full-time jobs were lost in December was a bit of a shock, as it was the biggest fall since March 2003, and before that, the 1991 recession.

And while 42,800 part-time jobs were added, this might not be such a great sign either, as JP Morgan economist Helen Kevans explains: “This may be an indication that worker hours have been cut back, or that people have re-entered the workforce and taken on part-time jobs to help make financial ends meet.”

OK, so the jobs market is softening quickly. Where to from here?

The big question economists are currently struggling with is; how quickly will the employment market deteriorate? Certainly the forward-looking indicators, particularly job ads data and business confidence surveys, point to a sharp rise in unemployment as businesses cut back hard on spending initiatives.

But as CommSec economist Craig James argues, businesses are probably reluctant to take the drastic step of sacking staff after being burnt so recently by skilled worker shortages.

“And a more flexible workforce is the result. More part-time positions will be created in coming months as employers attempt to have more control over labour costs by best managing existing staff,” James says.

Better to have a part-time job than no job at all, I guess.

True, but it’s worth remembering that this will leave consumers with less money in their pockets, which will result in falling consumer spending. That will inevitably lead to further job cuts, particularly in sectors such as retail, wholesale and hospitality.

So where will the unemployment rate be at the end of the year?

The best consensus is around 6%, although most economists warn this is probably a conservative forecast. In the US, the jobless rate leapt from 5% in April to 7.2% in December.

And longer term?

Not a pretty picture. JP Morgan estimates that the unemployment rate will double to 9% by the end of 2010, although the bank is quick to point out that this will actually be a better outcome than during the recessions of the early 1980s and early 1990s, when the jobless rate hit double figures.

So we’ve got a tough few years ahead. Any good news?

The RBA will be watching the unemployment rate closer than anyone. It’s likely to keep cutting rates over the next few months to around 3% to 3.5%, and will probably leave it there for an extended period.

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• Economy 2009: 10 key forecasts
• Australia’s flexible work habits may mask the true state of the economy