Vital Signs: where are all the jobs?

Two important observers of the Australian economy – one foreign, one domestic –revealed rather upbeat assessments about economic growth this week.

The minutes from the RBA’s April board meeting were punctuated with positives:

“conditions in the global economy had continued to improve over 2017…GDP growth was expected to be above potential over 2017 in all three major advanced economies… the increase in the US federal funds rate in March had been well anticipated…financial conditions in the United States had eased slightly, including via a depreciation of the US dollar, a decline in corporate bond yields and a rise in equity prices…The European Central Bank (ECB) and the Bank of Japan had both left their policies unchanged in the prior month, while noting that domestic economic activity was improving.”

Meanwhile, the IMF world economic outlook had positive news for the global economy, with world growth forecast to rise from 3.1% in 2016 to 3.5% this year, and 3.6% in 2018.

The Fund forecast Australian economic growth to increase from 2.5% in 2016 to 3.1% this year, and 3.0% in 2018. The IMF also rightly pointed out that the bizarre policy to tax companies of different sizes at different rates was a drain on growth, and that we could enjoy an additional 1% growth for nearly a generation by eliminating that silly distinction.

Yet despite the good vibes about growth, the RBA reiterated its long-held concern about the Australian labour market, noting this month that labour market conditions were “somewhat weaker than had been expected”. And they were already expected to be pretty weak. The RBA concluded that “developments in the labour and housing markets warranted careful monitoring over coming months”.

And therein lies the continued bind for the central bank and the Australian economy generally. It’s good news that growth may be picking up – that will even help tax receipts and hence the budget deficit. Or, to be more accurate, on May 9 the budget will contain forecasts about nominal GDP growth that are unprecedented based on the last 10 years. But unlike last year when I burst out laughing at the GDP forecasts in the budget, this year I might just grin.

That growth, along with subdued inflation, might otherwise tempt the RBA to consider a rate cut, or certainly not an increase.

Originally Published by The Conversation, continue reading here.