Finding staff remains a challenge but a surge in international arrivals has improved labour supply and could support the slowing economy.
HSBC economist Paul Bloxham said the effect of reopened borders in late 2021 was still playing out and creating uncertainty for the Reserve Bank in tackling inflation.
“One of the really fundamental things that happened was we closed the border and we reopened the border and that’s had some very large effects on how the economy operates,” he told AAP.
“It’s actually made it really hard for the economic models we use to deal with.”
The resilience of the labour market, which has been strong for several months, has been a source of confusion given there have been 12 interest rate hikes since May last year.
The economist explained it took time for slowing economic activity and less demand for goods and services to translate into fewer hires or lay-offs.
He said this was common across most downturn cycles and the opposite was true as things improved, with businesses taking a while to bring on recruits as demand ramped up.
Mr Bloxham said this economic cycle had a few abnormalities, including the effect of reopened borders on migration numbers, boosting labour supply.
For the Reserve Bank, a weakening of the labour market and subsequent wage pressures could help support the economy.
“That would give us the softest of economic landings because it wouldn’t be about firms cutting back on workers or laying off workers, it would be about firms having ample supply of workers – and that means you take the heat out of the economy from the supply side,” Mr Bloxham said.
“This could also create less risk for financial stability, if many workers that have mortgages retain their jobs.”
The pandemic-influenced labour market may also be exaggerating the lagging effect by prompting employers to hang onto workers who were so hard to recruit.
But with so much uncertainty hanging over how the economy is responding, Mr Bloxham said it was very hard to tell if the RBA had already hiked interest rates enough or needed to do more.
The influence of the migration boom – and this impact on labour and housing markets – may be reaching an inflection point, with the supply of arrivals likely to ease after the catch-up period of the last year.
AMP economist Shane Oliver said it was important to remember unemployment and inflation were lagging indicators and would react after economic activity moved in one direction or another.
The group’s leading indicator of jobs growth, based on vacancies and hiring plans, is pointing to a sharp slowdown ahead.
“Still low unemployment and still high inflation are not that unusual despite slowing growth because they both normally lag big swings in the economic cycle – running the economy with too much focus on them is a bit like driving a car with the rear-view mirror,” Dr Oliver said.
He said the RBA needed to tread carefully and allow the lags to work through or risk pushing up unemployment higher than needed.
“Fortunately, the minutes from the last RBA board meeting suggests it’s aware of the risks,” Dr Oliver said.
Poppy Johnston
(Australian Associated Press)
