The outlook for unemployment

It’s easy to forget just how much the pandemic blew the economy off course. Here are six metrics to remind us. These are not small movements, and they are all pushing in one direction.

The Everything Boom created a lot of headaches - labour shortages, price gouging, new car wait-times, ‘quiet quitting.’ The RBA reduces all of it to one simple concept: inflation. Simply, we've been sailing too close to the wind.

I am a big believer in 'mean reversion.' It's the theory that, while statistics jump around, they tend to revert to their long-term average. It's a concept we should all get really comfortable with because every central bank in the world is intent on putting their economies back on a normal heading.

It looks like 2024 will be the year they get what they want.

All eyes on unemployment

The labour market is the main arena where this will play out. The Everything Boom collapsed the unemployment rate to well below four per cent and spiked inflation to 7.8%. Neither of these numbers are sustainable.

That unemployment is going to rise from here is not seriously in question. The only real question is where will it settle - four, five or even six per cent?

The unemployment rate reflects the balance of the number of people who want to work and the number of jobs available. Higher unemployment can result from adding more people to the workforce (e.g. via immigration) or from creating fewer jobs (e.g. via recession).

So forecasting unemployment is essentially an exercise in predicting what will happen to labour supply and jobs growth. For the next year or two, that will basically be a process of mean reversion.

Here’s how I see it playing out.

Labour supply

Net overseas migration is the key driver of Australia's labour supply. It's currently double the pre-pandemic level.

A lot of people seem to think this is a 'new normal.' I’ve argued it’s more like a period of 'catch up' to recover the population growth forgone during the pandemic. The number of visas issued for temporary migrants—a key leading indicator—is already almost back to normal.

My forecast is that net overseas migration will continue to rise until the end of 2023 before falling back to the pre-pandemic trend by mid next year.

Jobs growth

The Everything Boom will not survive the RBA's onslaught. In fact it has already started to unwind.

Job creation has been decelerating now for 18 months. Job vacancies are finally falling, as is the participation rate. Company profits are shrinking and insolvencies are rising. Wage growth has rolled over.

These trends are deflationary but not in my view recessionary. I expect the rate of new job creation will dip below the long-run average in mid-2024 before returning to the pre-pandemic trend in 2025.

The upshot

Putting all this into the statistical pot* produces a classic mean reversion scenario:

Migration may overshoot somewhat, and the RBA might do a little more damage than needed to get back to trend. But unless something goes seriously wrong, I expect we’ll be back on a normal economic heading by the end of next year.