SYDNEY — The Reserve Bank of Australia has lowered its 2022 unemployment forecast, highlighting the continued momentum of the resource-rich economy despite rapidly rising interest rates and a jump in costs for households and businesses.
With the unemployment rate already at a 48-year low of 3.5%, the RBA now expects the figure to fall to 3.25% by the end of this year. In May, the central bank had forecast that unemployment would only fall to 3.75% this year.
The downward revision comes as economists raise their forecasts for second-quarter gross domestic product growth, stoked by resilient consumer spending and a record terms of trade boom.
Labor scarcity is in part being driven by a slow recovery in the supply of skilled international workers. That tightness expected to remain a feature of the economy for many years, with the RBA forecasting that it will still be at a historically low rate of 4% in late 2024.
Job vacancies and advertisements are at exceptionally high levels, with many employers reporting that they can’t attract staff, the RBA said Friday in a quarterly update on the economic outlook.
“Many employers have reported in liaison and business surveys that they plan to increase headcount further but are finding it harder to do so,” the central bank said.
The RBA has previously estimated that full employment in the economy was represented by an unemployment rate somewhere in a range of “high 3s to low 4s.”
The labor-participation rate is estimated to be at its highest levels in 112 years.
The fall in the RBA’s unemployment forecast comes as some market economists project that the jobless rate will drop below 3.0% over the medium term.
As the job market remains drum-tight, stronger wage growth is expected to emerge over the coming quarter, the RBA said. An increasing share of companies have reported that they are paying larger wage increases this year, it added.
The labor market is a bright spot in what is otherwise a worrisome outlook for the economy.
The RBA expects trimmed mean inflation, which underpins much of its policy decisions, to peak at around 6% by the end of 2022. Headline inflation is set to soar toward 8%, a level not seen since the early 1990s.
So the RBA has a long road ahead in getting inflation back to within its 2% to 3% target band. It forecasts that both headline and core inflation will only just be touching the top of the band by late 2024.
The central bank has been raising interest rates at speed since May, having been slow to see the jump in inflation.
It has so far delivered 175 basis points of increases to the official cash rate in less than 100 days, with more hikes expected over the second half of the year.
The RBA’s projections imply that a slowdown in GDP growth will play out over coming years, but it isn’t yet forecasting a recession in the economy.
It lowered the 2022 economic growth forecast to 3.25% from a projection of 4.25% in May. Growth is expected to contract further to around 1.75% in both 2023 and 2024.