Next month’s interest rate decision is shaping up as one of the easiest calls Australia’s Reserve Bank has had in years, yet the policymakers sit frozen as the economy weakens around them. The warning signs are already here, and the cracks in the economy are becoming impossible to ignore.
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Unemployment has climbed to 4.5 per cent, the highest level since 2021, while employment growth has slowed. The labour market is clearly weakening, particularly as government spending slows and sectors tied to programs like the NDIS face tightening budgets and hiring pressure.
That matters more than many people realise. The care economy has been one of Australia’s biggest sources of employment growth over the past few years. In some periods, NDIS-related jobs accounted for close to one in every five new jobs created nationally. If that spending slows, the hit to employment could be far larger than markets currently expect.
At the same time, inflation is easing, and the market is starting to realise what has really been driving much of the inflation problem all along: Oil.
It has now spent almost two months trying to break above the US$100 to US$110 range and failed each time. That matters because markets have already stress-tested the worst-case geopolitical scenario. Every major escalation in the Middle East sent oil to $110, yet each time negotiations or ceasefire discussions emerged, prices collapsed almost instantly, including multiple double-digit percentage falls in a single day. That tells you something important.
The market already knows where the panic ceiling for oil likely sits, but it may not yet be pricing in the downside if broader negotiations continue. In other words, we now have a much clearer picture of the upside risk for energy prices, while the bigger surprise may now come from how quickly inflation falls if oil keeps retreating.
Meanwhile, higher interest rates have already crushed borrowing power, consumer confidence is fading, businesses are slowing hiring, and households are cutting spending. Proposed changes to negative gearing and capital gains tax are also weighing on investor confidence at the exact moment Australia is already struggling to build enough homes.
The RBA risks solving yesterday’s inflation problem while creating tomorrow’s recession. That’s the real danger now. Interest rates work with a lag.
The damage from previous hikes is only just starting to hit the economy, and by the time the slowdown becomes obvious in the data, unemployment may already be out of control.
At some point, the focus must shift from fighting inflation to protecting growth because if unemployment keeps rising while productivity keeps falling, the economy won’t need another rate hike; it will need a rescue package.
Good luck and good trading.
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Dale Gillham is Chief Analyst at Wealth Within and an international bestselling author of How to Beat the Managed Funds by 20%. He is also the author of Accelerate Your Wealth—It’s Your Money, Your Choice, which is available in bookstores and online at www.wealthwithin.com.au.
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