Australian labour market to run out of steam in 2024

The Australian economy is slowing, with tight monetary policy and falling real incomes curbing demand and earlier supply constraints still affecting the realisation of investment projects. However, these headwinds are yet to cause much of a deterioration in the labour market. While the unemployment rate jumped by 0.2 ppts to 3.7% in July, it is still too early to confidently call a turning point in the labour market. Indeed, hours worked increased in July, so there are still signals that momentum is holding firm.

Still, the unemployment rate is well below conventional estimates of its ‘natural’ rate, and some deterioration in the labour market will be needed to bring down inflation. A key question for the outlook in the near term is when this slackening of the labour market will occur.

This three-page research report expands on the following points:

• The labour market has been remarkably resilient to the current economic slowdown. But the strong labour market performance can’t go on indefinitely; a key uncertainty for our outlook is when the labour market will turn. While economic activity does impact the labour market with a lag, most forward indicators of the labour market only point to a modest slowdown in the months ahead.
  
• The backlog of job vacancies has supported the labour market in recent months. While job vacancies have come down, they remain well above their pre-pandemic levels. There are sharp differences in the recent trajectory of job vacancies across industries – to a large extent this appears to be attributable to a fall in vacancies for lower-skilled jobs.
  
• The high level of job vacancies will help soften the deterioration in the labour market over the rest of this year. But over the next few quarters, the unemployment rate will be hit by the twin headwinds of slowing demand and steady growth in labour supply. We expect the deterioration in the labour market to be in full swing in 2024. We expect a modest slackening in the labour market over the rest of year and forecast the unemployment rate to rise to around 4.5% by the end of next year.