Unemployment jumps, raising the chances of an economic downturn | The Business | ABC NEWS

I think you can take a little bit more information from this than normal and I think it is telling us that the labour market is starting to show some cracks because the economy is tipping into a downturn.

Paul Bloxham, a significant tick up in the unemployment rate.It's risen much faster than the RBA would have expected at this point.

Well that's right and I think also a fall in employment in the numbers for April and I think that's another signal indicator that we have that tells us that the economy is weakening quite quickly, that we're going into a downturn.I think I would add that to The sharp fall we've seen in business confidence, the weakening we've seen in consumer sentiment, the fact that auction clearance rates have fallen, and there's even some indications that house prices on a very timely basis are starting to fall as well.We need to have a downturn in Australia, it turns out, to get inflation down.And I think it's already starting.And I think these numbers are just one more part of that picture.

When it comes to the monthly unemployment series, it is notoriously volatile.So could this just be noise or do you think it's a genuine weakening of the jobs market?

I think you're right that this survey is quite volatile and month to month we can't put too much weight ever on any one monthly indication from it.But I think when you look at it in the context of all the other indicators that we've got, the ones that I've just listed off, that are all pointing in the same direction, all telling you that the economy is weakening and has weakened quite quickly, then you add this into that picture, I think you can take a little bit more information from this than normal.And I think it is telling us that the labour market is starting to show some cracks because the economy is tipping into a downturn.

Has this come faster than many would have expected?

That's true, although we've been forecasting that GDP would contract in the second quarter of this year.We haven't got that print yet.We don't get it till September.But that's been our forecast now for a couple of months.And we've done that on the basis of the economy having faced two shocks at once.One shock, of course, has been the RBA lifting interest rates in three consecutive meetings, lifting rates by 75 basis points.

That's a shock.And then, of course, there's the Middle East conflict shock, which has flowed through to us throughhigher fuel costs, but also having a big impact on sentiment.And I think the combination of those two shocks together has been what we really thought would be push the economy into a sort of downturn more quickly.

I'll pick you up on that downturn bit in a second.But in terms of this particular data point, we've seen market bets for rate hikes in June scaled back, not that they were significant to start with.What does it do to your outlook for interest rates?

We think and have thought till this point also that the RBA isn't going to have to lift interest rates any further, that although inflation is high and that's obviously a really big focus for them, they've already lifted interest rates three times.They're already getting some signs that it's having a pretty decent impact on the economy, and we've got a global effect flowing through from the Middle East conflict, which is also driving the economy into more of a downswing.We think although the RBA won't be able to cut interest rates in the face of this downturn, I think that they won't be necessarily deciding to want to lift them any further either.Once the labour market turns, I think the RBA tends to sit still rather than want to hit the economy even harder.

So you've mentioned the word downturn a number of times now.What does that look like?Are we talking recession?

Well, it depends on what you mean by recession.I genuinely mean that.Like, there's no consistent definition of what we mean as economists by recession as such.But what we've got in mind is that growth slows down from 2 .6 % last year, where it was running, to 1 % this year, that we do see a contraction in GDP in the second quarter of this year, and we think that'll all combine to push the unemployment rate up further, and we see the unemployment rate rising to 5 % by the middle of next year.That's not a great outcome really in the scheme of things but it's the sort of thing we need to have if we're going to get inflation back to target over a reasonable time period.

And you think if the unemployment rate goes to 5 % we'll get inflation back to target?

I think that this will put a disinflationary impulse into the economy.economy that will gradually move inflation back towards the Reserve Bank's target over an extended period.I mean, the first thing we've got is we've still got more upside to come through in terms of inflation because of the shock that's coming from higher fuel costs and the closure of the Strait of Hormuz.So, inflation goes up before it goes down, but I think this will be enough to get the RBA to sit still.

How much of a risk is it that Australia is facing a prolonged period of rising unemployment and rising inflation creating a really big conundrum for the RBA.

Well this is the word that we all talk about in the background and that's stagflation.What is the risk of stagflation?By stagflation we mean a stagnant economy where growth doesn't do very much, in fact it might even fall, where the unemployment rate remains higher and of course we've still got inflation.I don't think we're quite there yet as to sort of thinking that that's our central case but I can say that that is starting to become more and more of a risk in terms of the way we're looking at things.

And do you think in that scenario the RBA prioritises inflation over the unemployment rate?

This puts the RBA in a very tough spot.And I think, you know, in terms of where they... ..the choices they might decide to make, I think that they will look very carefully at the fact that they've got a dual mandate to keep as close to full employment as possible but still get inflation down.And I think...My working assumption is that they, at least in recent times, have generally prioritised keeping close to full employment.So I think while inflation is a challenge, if inflation starts to look like it's heading back to target over time in an underlying sense, I think that'll stop the RBA from slamming the economy even harder.

And Amin, you mentioned the conflict in the Middle East, the rate rises, we've seen consumer sentiment, business confidence, all of those kind of indicators, pretty negative.How much of the economic outlook, I suppose, is contingent on this Middle East conflict ending soon?

Well, so it's a big factor.I mean, and this is something on a global scale.are watching so carefully at the moment.And it's a lot to do with, of course, how long does the Strait of Hormuz remain closed?How closed does it remain?We've seen over the last day or so, a few ships have been getting through.

So what does all that look like?And what sort of supply disruption that does that deliver to the global system?It's partly about oil, it's about gas, but it's also about fertiliser and helium and sulphur and aluminium, all these things that we get out of the Middle East.The longer it goes on, the more likely it's going to deliver weaker growth outcomes and more and more inflation.And it's very difficult to know exactly how long it's going to go on, but it's been going on now for almost 12 weeks.So it's already having tangible effects.

Paul Bloxham, thank you.

Thank you.