Rising Unemployment, Inflation, and the Potential for Reform

Last week the National Accounts prepared by the Australian Bureau of Statistics were released for the December 2023 quarter. The key points in the report were that the Australian economy rose 0.2% in seasonally adjusted chain volume measures and in nominal terms GDP by 1.4%. The terms of trade grew 2.2%, while household saving to income ratio increased to 3.2% from 1.9%.

Gross domestic product growth was driven by government expenditure and private business investment. Domestic demand continued to slow in the December quarter as households tightened their spending, while investment slowed following three quarters of growth. Australia’s economic landscape is undergoing significant changes, with rising unemployment combined with slowly falling inflation creating a challenging set of factors for economic policy and their implementation.

Historically, Australia has prided itself on avoiding a technical recession for nearly three decades following the early 1990s downturn. However, this achievement misrepresented the reality faced by workers during this period. Alternative economic definitions, focusing on rising unemployment, reveal that Australia experienced two mild recessions during the dotcom bust and the Global Financial Crisis. These unemployment spikes contrast strongly with the repeated political claim that the Australian economy avoided a recession for three decades, albeit through a narrowly defined measure, compared with a measure that is more readily understandable and experienced by most of the workforce.

Enter the Sahm Rule, devised by US economist Dr. Claudia Sahm. This rule uses a moving average of the unemployment rate to detect early signs of recession, providing policymakers with a timely warning. For Australia, a recession would be classified when the moving average of the unemployment rate rises by 0.75 percentage points from a recent low. Current trends are concerning as unemployment climbed from 3.6% to 4.1% in five months and according to the Sahm Rule suggest a recession is underway.

In response to these challenges, Dr. Sahm proposes an innovative solution: the use of the Sahm Rule to trigger automatic stimulus payments at the onset of a recession. This approach aims to support economic activity and lessen the downturn’s impact on workers. By deploying automatic stimulus payments early, it may be possible to curb the significant unemployment spikes typical of recessions.

The discussion around future economic policy, particularly the concept of automatic stimulus payments, is gaining traction. Although current inflation concerns make the immediate implementation of such measures unlikely, the idea presents a more active strategy for managing future crises. By eliminating the unpredictability of political responses and providing targeted support, automatic stimulus payments could offer a more stable economic environment for households.

Dr. Sahm’s research into the optimal implementation and eventual phasing out of these payments continues, this work promises to offer valuable insights into how Australia can better prepare for and navigate future economic downturns. As Australia faces its current economic challenges, the exploration of new policy tools and strategies such as those proposed by Dr. Sahm could play a pivotal role in fostering a more resilient and equitable economy.