If you’re interested in property investment you’d also be keeping a careful eye on our economy.
The problem is there is so much economic data out there you would be forgiven for not knowing where to start.
One day it is the price of commodities we should be worrying about and the next day it is inflation. The next week there is talk of the mining boom ending and our currency being too strong and the week after that Australia’s GDP and interest rates are falling.
Ultimately, however, an awful lot comes back to one simple figure….
The percentage rate of unemployment.
If the overwhelming majority of us have jobs and are earning a wage then many of those other numbers, while waxing and waning over time, will eventually take care of themselves.
Unemployment tends to lead to misery and unrest, and it is for all of these reasons that our political parties will invariably have a stated aim of keeping unemployment to an absolute bare minimum.
On the most dispassionate level it can be economically beneficial for dynamic companies to ‘hire and fire’ at will and this can help to keep to economies buoyant and growing, but politically and socially developed countries try to protect their workforces.
The lack of protection for the workforce in the US is perversely one of the reasons that job creation in the US has historically grown more dynamically than the equivalent levels seen in Western Europe.
What does ‘unemployed’ actually mean?
Of course, when it comes to economics it is never allowed to be that simple. I’ve written probably too many times about why unemployment is never likely to fall much below 4% in Australia.
There will always be some structural and seasonal unemployment and some frictional unemployment (those between jobs). And, for various reasons, there will always who are unable, incapable or unwilling to work which ensures that the figure remains well above 4%.
Economists tend to define someone who is unemployed as a person who is not working but is actively seeking to return to the labour market.
Of course, there are always problems with measuring unemployment for simply counting those who are claiming benefits excludes, among others, those who are too proud to do so. And what of students or pensioners? The simplest method therefore is often to survey a cross-section of the population.
NAIRU and the Phillips Curve
In monetary economics, NAIRU is the Non-Accelerating Inflation Rate of Unemployment. The term was first coined in the early 1950s and is sometimes also known as “low full employment”.
The idea arose from the famously popular theory of the Phillips Curve. While many have questioned the validity of the theory, the Phillips Curve determined that, in the simplest terms, if unemployment becomes low then the inevitable consequence must be higher inflation. Conversely, it was argued, if unemployment moves higher the decreased spending power of consumers eventually must bring inflation lower.
The Treasury has estimated that Australia’s NAIRU is close to 5%, so if unemployment falls to around that level, we are doing pretty darned well. The Reserve Bank’
s target range of inflation in Australia is 2-3%
Unemployment rates in the world today
In December the unemployment rate in the US held steady at 7.8%. In an unusual step the Federal Reserve in the US has stated that it intends to keep interest rates at close to the bottom of the zero bound until US unemployment rate falls below 6.5%.
Rates in the US have been close to zero since for more than 4 years now. The Federal Reserve also continues to buy $85 billion each month of government bonds and mortgage-backed securities in an attempt to stimulate the flagging US economy.
But even the struggling US has things relatively good as compared to parts of Europe. The EU reportedly has an unemployment rate of well above 10% and in some countries such as Greece and Spain the rate has been more than 25% (although official figures are not always accurate due to those who work ‘unofficially’ but pay no tax).
And what for Australia?
Well, now for the good news:
Yes, that’s correct, our unemployment rate as reported by the impartial Australian Bureau of Statistics (ABS) has actually declined to just 5.2%. As noted above, it is unlikely that the rate of unemployment will fall a great deal further than that. Meanwhile the headline rate of inflation remains at the bottom of the target range at a decidedly unthreatening 2%.
Economic bears have been befuddled by the continuing low rates of unemployment. Housing market bears drill into all manner of data from participation rates to the number of student visas to international departures in order to desperately seek out any kind of statistics which support their preconceived notion of an Australia-wide housing crash.
In fact, each time the labour force data is reported bearish commentators try to find reasons why unemployment must surely be far higher than as reported, but the number just keeps sticking at well under 5.5%.
You can dress the figures up any way you want. Australia’s population increased by 359,600 people over the 12 months to June 2012 and unemployment remains emphatically low. High employment can only be great news for Australians.
And as for the housing bears who keep insisting that prices will correct by 40% or more (it didn’t happen in 2012 – again), I would suggest they look a little more closely at the ABS population growth figures:
What they show is that while some states such as Tasmania, the Northern Territory and South Australia only experienced low absolute increases in their population, the states which house the major capital cities such as Victoria (+89,000), Western Australia (+78,000), Queensland (+86,000) and New South Wales (+78,900) all saw their populations increase massively in
Expect strong population growth to continue over the next few decades and with it the demand for prime-location property in the four major capital cities.
The next labour force data will be released by the ABS on 17 January.
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