The Reserve Bank of Australia's recent decision to lower the official cash rate by 25 basis points to 0.75 per cent should be sounding alarm bells for the government. This latest cut is the third since May 2019 and reflects ongoing weakness in the Australian economy.
Treasurer Josh Frydenberg's attack on banks for failing to pass on the full rate cut to consumers is a political distraction. Frydenberg and his Treasury officials are well aware of the precarious state of the Australian economy, but they dare not name it for fear that any negative sentiment from the government could trigger further unravelling of the economy and their prized surplus.
There are two clear signals coming out of the RBA's latest cut. Firstly, monetary policy is not enough to spark a revival of the Australian economy. Secondly, it's now all about jobs. Frydenberg and his officials would be wise to heed these signals given that it was only 12 months ago that the RBA was considering lifting the official cash rates. The message for the government is jobs, jobs and jobs.
The last increase in official interest rates occurred in November 2010, which took the official rate to 4.75 per cent. There has been a steady reduction ever since. Prior to the global financial crisis, the RBA's focus was more on containing inflation than achieving full employment. However, since then, the RBA's attention has shifted to jobs and wages growth.
While the government might take some joy in an unemployment rate sitting at around 5.2 per cent, the rate of people looking for more hours of work sits at around 8.5 per cent. Combined, there are close to 1.9 million people being under-utilised because the economy is unable to deliver enough jobs or hours of employment.
The Australian Bureau of Statistics' labour force data shows that since about 2003, there are more people looking for additional hours of work than those who are unemployed. Underutilisation of labour is the sleeping giant in the Australia economy.
Underutilisation of labour in Australia is trending upwards, which is an indication that Australia's employment market is much softer than the official unemployment rate would indicate. This goes some way to explaining the ongoing issue of low wages growth in the economy.
"Frydenberg and his boss, Prime Minister Scott Morrison, need to think about fiscal stimulus and job creation programs, even if it comes at the expense of the budget surplus."
It also highlights