The suggestion that the Reserve Bank will need to cut rates sometime this year highlights the fragile nature of the Australian economy at the moment. It also highlights the imprecise workings of monetary policy, as any rate cut will most likely have an impact in the one area in the country where things are doing best – Sydney.
The RBA began its cycle of interest rate cuts all the way back in November 2011, and it is fair to say a lot of things have changed in the past four years. At that time, the RBA cut rates by 0.25 points from 4.75% to 4.5%. To get to 4.5% the RBA would now need to raise interest rates by more than double the current rate of 2.0%.
In the four years prior to November 2011, the cash rate had averaged 4.93%; in the four years since then, the average has been 2.8%:
But while we are now in an economy where the thought of interest rates being raised to previously average levels would cause massive conniptions, the biggest change has been in the performance of the states.
In November 2011, all economic measures made it pretty clear, as The Doors would say, that the west is the best. Employment in Western Australia was growing annually at 3.4% and would rise to 5.5% in 2012, while employment in the rest of the country was growing at just 0.6% and wouldn’t rise above 1.0% at all in 2012:
But now employment out west is growing at just 0.3% whereas in the rest of the nation it is 3.0%.
One other way to compare the change in the economy is to look at the impact of each state on the national unemployment rate.
In November 2011, the national unemployment rate was 5.2%. Had we excluded WA from the national count, the rate would have risen to 5.3%, whereas if we had taken away other states, the national rate would have either stayed the same or risen:
Given Western Australia only accounts for around 11% of Australia’s labour force, it was an astonishing situation where it in effect balanced out the rest of the country. Notably, the state that was then the biggest drag on the unemployment rate was NSW.
The interest cuts were aimed at getting construction going in NSW and Victoria, and by the election in September 2013 the signs were there that things were improving in the two big non-mining states, but especially in NSW.
In September 2013, WA remained the only state which, if not included in the national unemployment rate, would have seen the rate rise. The national rate at the time was 5.7%, but if we excluded WA the rate would have been 5.9%.
While WA was still the nation’s economic powerhouse, employment growth in that state was seriously slowing, and it was rising in NSW. NSW had also gone from being the biggest drag on the national unemployment rate, to now being pretty much representative of the national average.
Fast forward to December last year and we see WA is now the unemployment rate anchor.
The national rate is 5.8%, but if we were able to give WA secessionists their freedom and saw off the state a la Bugs Bunny cutting loose Florida, the rate would have been 5.7%. More stark, however, is that if NSW was excluded from the count, the rate would have been 0.3% points higher at 6.1%:
That different parts of the economy are growing at different speeds isn’t all that unusual, but right now we have an odd situation. Usually, the NSW and Victorian economies dominate the economic discussion. If they’re doing poorly (regardless of what is happening in other states like WA or Queensland) then stimulus is usually not far round the corner via interest rate cuts or perhaps fiscal measures.
But right now NSW, and to a lesser extent Victoria, are the two states which have seen their housing markets take off on the back of the interest rate cuts since November 2011.
So amid all the talk of possible rate cuts because the world economy is slowing, China is slowing, and the stock market falling is the quandary that a rate cut would most stimulate the city that least needs it.
And we’re talking city, because while the unemployment figures are mostly talked of at the state level, the ABS also releases unemployment rates by region. The figures at such a small level get a bit erratic as the ABS does not seasonally adjust the figures, but using a rolling 12-month average takes out a lot of the noise.
And the figures show that it is not so much NSW that is doing better than everywhere else, but Sydney.
The unemployment rate of the greater Sydney area is currently 5.1% compared to 7.1% for the rest of NSW. This is the biggest disparity between the city and rest of the state for any state:
It also has the biggest disparity of unemployment rates across individual regions. The Sydney northern beaches area has the lowest average unemployment rate in the country over the past 12 months of just 2.6%. By contrast, the Hunter Valley (excluding Newcastle) area has the second highest average unemployment rate of 10.2%:
With a government that remains focused on cutting expenditure and getting back to surplus, any stimulus to the economy will likely have to come via the Reserve Bank, which is why the market continues to expect the RBA to cut rates by July-August.
But before doing so the RBA will have to weigh up whether such a cut would only serve to add more heat to the Sydney and Melbourne housing markets and to mostly assist areas that are already leading the way.
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