Credit crunch eases but jobs crisis grows

THE global recession continues to worsen, but the Australian economy is showing signs of recovery.

I would be surprised if the Reserve Bank cut rates today, though it may reiterate its continued readiness to do so.

US employers slashed 467,000 jobs in June, 100,000 more than expected. That lifted the unemployment rate to 9.5 per cent, the highest rate in nearly 26 years.

The next milestone expected by economists is 10 per cent, with many economists expecting the post-World War II high of 10.8 per cent unemployment, set during the Reagan administration in 1983, being topped by Christmas.

The global share price recovery was widely interpreted as due to anticipation of global economic recovery.

The recent falls in equity markets show there is new uncertainty, and the loss of confidence by market participants will have an adverse impact on many households and businesses.

Britain, Germany and Japan are all experiencing their most severe economic downturns and Europe overall is struggling almost as much, with unemployment also at 9.5 per cent.

The eurozone banks still have not "cleansed" their balance sheets, and this remains as a possible flashpoint.

Globally, however, credit is becoming easier to get, but the credit crisis is being replaced by a jobs crisis.

China is defying the global trend as its massive fiscal stimulus is reigniting rapid economic activity.

There has been a surge in China's exports to other developing economies, and this is a sign that underlying global imbalances are far from resolved.

The biggest imbalance of all is the developed nations' continued reliance on borrowing and lending, and the automatic resort to deficit spending financed by additional borrowing merely entrenches this imbalance.

China's exchange rate remains low.

One assumes this comes into the "don't mention the war" category when America's Treasury Secretary visits Beijing, but is a situation that will need to be remedied if existing imbalances are eventually to be sorted.

China's recovery is of course Australia's bounty, with China in recent statistics passing Japan as Australia's greatest trading partner.

Certainly the major mining companies are sounding cheerier, putting it about that developing economies are recovering, which will boost commodity prices and set the scene for improved economic performance generally. Australia's wealthier citizens are experiencing recession while, so far at least, poorer people's incomes and spending are being propped up by the Rudd government's handouts and other forms of stimulus.

Housing markets tell the tale.

Prices in the more expensive suburbs have fallen substantially, while cheaper markets have risen as first-home buyers use generous government grants and other stimulus to push up prices.

Retail sales have also performed well, reflecting the effects of substantial handouts and other forms of short-term stimulus for middle to lower income earners.

Despite their partial recovery share prices are well below their 2008 peaks and many formerly well-to-do retirees are facing a constrained future.

The result is a two-speed economy, but continued increases in unemployment may change this situation, especially if wages begin to surge.

Last week saw a debate on wages, coincidentally just as Howard's WorkChoices legislation was replaced by the Rudd government's Fair Work legislation.

Official measures of unemployment have risen to 5.7 per cent -- well below comparable measures in the US and other developed nations.

This is the good news, though further increases can be expected later this week and during the remainder of 2009.

However, as we have shown conclusively, official rates severely underplay the real situation, especially when Australia's substantial underemployment is allowed for.

Latest data from Roy Morgan -- based on our research on Australia's forgotten workers -- shows Australian unemployment rose to 7.8 per cent (up 0.4 per cent) during June. This is a total of 862,000 Australians out of work and looking for work. This is well on the way to topping 1million unemployed Australians later this year.

The picture for the under-employed (part-time workers who want to work more hours) was even worse, with many more Australians now part of this classification.

The Roy Morgan June 2009 "under-employed" estimate is 967,000 (8.8 per cent), up a large 306,000 (2.9 per cent) on May 2009.

In total in June, an estimated 1,829,000 Australians (16.6 per cent) were unemployed or underemployed, up 343,000 on May.

This measure, incidentally, omits another 4 per cent or so discouraged workers who surveys say have given up the idea of finding a job.

Note that the sharp drop in job vacancies supports the reading from the Henry Thornton-Roy Morgan data rather than the ABS data. If the Reserve Bank had been using the more accurate labour market data, it would have stopped hiking interest rates sooner last year and rates would now be lower.

With the two-speed economy, concern for real unemployment and underemployment makes (or should make) their decision today excruciatingly difficult.

The Reserve Bank struggled with the two-speed economy during the boom, when it was slow to raise interest rates then kept raising rates despite the undue pressure on poorer households as the prices of oil, food and housing rocketed up.

Now the well-to-do members of society are suffering more with lower asset prices and (Henry suspects) substantial hidden unemployment among senior corporate players and self-funded retirees whose pensions have been slashed by the share price meltdowns.

Politically, Labor will not worry much about the relative suffering of wealthy Australians. The Reserve will share this perspective and in addition will take refuge in the overall economic data.

The salient features of the overall picture are low inflation and high activity relative to almost all other developed nations.

Factors making the case for another rate cut are the worsening of global economic conditions, rising unemployment (at a much greater rate than conventionally believed) and low inflation, well within the "target band" of 2-3 per cent.

Factors making the case for sitting pat include the revival of China's demand for commodities, strong retail sales, partial recovery of business and household confidence and low inflationary expectations.

On balance, I expect the Reserve to sit pat today with a cautious statement that means all things to all readers and which provides maximum freedom for future action.