Have they gone too far?

The main reason we care about recessions is because of what they do to employment. Sure, recessions hurt profits and devalue assets, but if that's all they did I bet we’d care about them a lot less.

No, the reason we fear recessions is because they cause businesses to slash jobs. The recessions of the '80s and '90s saw unemployment soar to 11%. Hundreds of thousands of people were put out of work. It was real, widespread pain.

The situation we're in today is very different.

Earlier this year I argued the supply-side of the economy—the labour market—was badly out of balance with the demand-side—production. We were simply trying do too much with too few workers.

We needed to cut our coat to suit our cloth, and that is precisely what the authorities set about doing. The RBA has now dished out 12 rate rises – four full percentage points in 13 months.

This strategy of 'demand destruction' has one inescapable side effect: the unemployment rate will rise. As we're forced to dial back our spending, businesses will adjust their sales outlooks and pare back their headcounts. This is by definition recessionary – it reduces economic growth.

Does that mean the authorities are deliberately engineering a recession?

I guess that's one way of looking at it. But if at the end of the day we settle on a 4.5% unemployment rate—which is what the RBA is targeting—we'll have the healthiest labour market in 15 years. If on the way we record a 'technical' recession, it would hardly be worth the name.

Now, National Secretary of the CFMEU, Zach Smith, makes the fair point that this assessment will be cold comfort to the roughly 150,000 people who will lose their job in this process. I get it.

But the unfortunate reality is our economy requires a certain amount of unemployment to function properly. To butcher Churchill, it’s the worst type of system, except for all the others.

Let me be clear though – any unemployment rate above 5.0% would be a clearcut policy error. They’ll have gone too far and put us into a proper, and completely unnecessary, recession.

As it stands, there is no evidence that's going to happen.

Demand for labour is still way above the pre-pandemic trend. We are also continuing to put an unusually large share of the population to work.

These couple of charts put a fine point on it:

Now it's often said that employment indicators are backward looking, and that's true. But the data suggests there's a long way to go before we need to worry about having overdone the adjustment.

That said, there's no doubt the economy has started to slow. Spending indicators are now declining as mortgagees divert a larger portion of their income to their banks. This will naturally cause businesses to pull back on investment and unemployment will rise in consequence. Stronger immigration may accelerate this process.

In other words, the RBA is only just starting to get its wish. Do not be surprised if there’s another hike or two on the way.

This is all as intended. Stay calm.