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Australia's unemployment rate is 3.5 per cent, and it hasn't been this low since August 1974.

Currently, there are 480,000 job vacancies and 494,000 officially unemployed people.

It equates to almost one unemployed person per vacant job, compared to three times that number before the pandemic hit Australia. 

Does this mean we're close to full employment?

What is full employment?

The concept of "full employment" has a fascinating history.

But when policymakers use it today, they're not using the term as it was originally intended.

Australia used to have an official policy of full employment. It was the foundation of our labour market from 1946 to 1975.

During that era, governments kept the unemployment rate below 2 per cent, on average, for nearly three decades.

It coincided with the long economic boom of the post-war years, which saw rising real incomes and vast improvements in the standard of living, and rapid growth in affordable housing.

But interestingly, the people who provided the intellectual foundations for the policy argued amongst themselves about what "full employment" should mean.

And it's worth reading how they thought about things.

Nugget Coombs, who was one of Australia's most influential public servants in the 20th century, was a key architect of the policy.

In 1944, he gave one of the first public explanations of what full employment could look like when he delivered the Joseph Fisher lecture at Adelaide University.

The title of his lecture was "Problems of a high employment economy."

In that talk, he defined full employment as a "high and stable level of employment" that would see "a few more jobs available than men and women to fill them."

He said full employment would tend to "a slight but persistent shortage of labour" (my italics).

But it wouldn't mean everybody would always have a job, either.

Why? Because some people don't have to work. Some people can't work (due to illness and disability). Others need time to move from one job to another. Some prefer seasonal jobs. And there will always be some unemployment as industries or occupations decline and new ones emerge.

But even accounting for those realities, he said full employment would see far more people in jobs than existed in the wasteful inter-war years, when 10 per cent of the workforce was frequently without work.

And at that stage, he envisaged full employment looking something like 4 per cent of men, and 2 per cent of women, who were seeking jobs being unemployed at any moment.

But a few years later, after full employment had become official policy, the unemployment rate fell to 1.2 per cent in 1947 and to 0.9 per cent in 1948.

Australia's long period of very low unemployment had begun.

Full employment had many dimensions

However, that low unemployment rate was just one aspect of full employment.

It's easy to forget today, but the original policy was embedded in a larger framework of whole-economy welfare.

And there are two points to make about this.

First, Coombs and his colleagues believed full employment should be supported by an Australia-wide employment service sitting at its centre.

That service would act like a centralised labour exchange: it would inform job seekers of any vacancies around the country, and it would let employers survey the entire field of available labour.

That's why they established the Commonwealth Employment Service (CES) in 1946, to render services to that end.

So, a crucial element of "full employment" was the institutional support that came with it. 

Second, the full employment policies weren't narrowly focused on helping people find jobs and keeping them employed. They were also concerned about the welfare of unemployed people and their families.

Coombs and other architects of full employment had painful memories of the Depression, with its high rates of poverty and destitution.

That's why he finished his 1944 lecture by arguing that Australia shouldn't return to its pre-war economy, "where the shock absorber for the vagaries of the economic system is the health, happiness, and lives of human beings."

The full employment framework acknowledged that unemployment wasn't the fault of the unemployed.

But what about a more confident work force?

Now, Coombs knew that some people in the community would dislike full employment.

Why? Because it could make workers harder to control. If jobs were plentiful, workers may get choosy.

"In the past labour discipline was based primarily upon the threat of dismissal, with its consequent fear of unemployment," he said in his 1944 lecture.

"If that fear is removed there may be reduced output, increased labour turnover, absenteeism, and so on."

However, he said employers and policymakers should be smart enough to figure out different ways to instil labour discipline, rather than relying on mass unemployment. 

"We cannot expect to transform the basis of labour discipline overnight after a hundred and fifty years during which it was based essentially on a threat," he said.

His observations were similar to those of the Polish economist Michał Kalecki, who in 1943 predicted there'd eventually be a backlash from the business community to full employment policies.

"It is true that profits would be higher under a regime of full employment than they are on average under laissez-faire; and even the rise in wage rates resulting from the stronger bargaining power of the workers is less likely to reduce profits than to increase prices, and this adversely affects only the rentier interests," Kalecki said.

"But 'discipline in the factories' and 'political stability' are more appreciated than profits by business leaders," he said.

What about full employment in modern times?

But fast forward to today, where full employment means something very different.

Things began to change in the 1970s.

When Australia's economy was hit by "stagflation" in the 1970s, and the unemployment rate jumped to double digits, policymakers abandoned their old commitment to full employment amid the chaos.

They embraced a new theory that said higher levels of unemployment may be "natural" for prevailing conditions.

And they adopted a new definition: full employment would mean the level of unemployment that kept a lid on inflation (that is, that stopped wage pressures and prices growing too quickly).

That meant the economy could apparently be in full employment when the unemployment rate was 4 per cent, or 6 per cent, or 8 per cent or higher.

It depended on conditions.

And that's what full employment still means today, when you hear policymakers referring to it.

When modern central banks lift interest rates to dampen inflation, they know the trade-off could be higher unemployment. It means unemployment is being used as an inflation shock absorber.

But we've also changed the institutions that support full employment today.

Policymakers slowly dismantled the Commonwealth Employment Service after the 1970s, with its "employment services" being privatised in 1998.

That privatisation has proven very profitable for the private companies that win lucrative government contracts to deliver those "employment services" each year. 

But it's also created a system in which unemployed Australians are getting trapped inside a punitive system of "mutual obligations" that feed the profits of the private providers.

Despite Coombs' warnings in 1944, we've deliberately pivoted back to a situation "where the shock absorber for the vagaries of the economic system is the health, happiness, and lives of human beings."

We're experiencing over-full employment?

So where does that leave us?

At the moment, economists who use the mainstream model say we're actually below full employment, if you can believe it.

That means they think there are more people employed than is sustainable for current conditions, and it's contributing to wage and price pressures and labour market inefficiencies.

They say the unemployment rate will eventually have to rise again.

It feels like a lifetime ago now, but in the Morrison Government's final budget in March, Treasury officials were forecasting the unemployment rate to fall to 3.75 per cent in the September quarter (we're now at 3.5 per cent).

They also assumed the current level of "full employment" was an unemployment rate of 4.25 per cent, meaning we're now experiencing over-full employment.

From an employer's perspective, that may feel right. Some employers say it's harder than it has been for years to find suitable workers.

And labour markets are relatively tight. 

The employment-to-population ratio, and the participation rate, hit fresh record highs last month. Part-time jobs are being converted into full-time jobs. The youth unemployment rate (15 to 24 years) has fallen to 7.9 per cent, the lowest since 2008.

But there's also a lot of noise in the system.

Even with such tight labour markets, most workers aren't seeing their relative scarcity reflected in higher wages — real wages are still slipping backwards.

Workers are suffering such high levels of illness that absenteeism has become a major issue, and the Albanese Labor government is having to be shamed into extending COVID relief payments to affected workers.

And we still have millions of Australians living below the poverty line, with thousands caught in a punitive unemployment benefit system that needs reforming.

So, this may be the closest we've come to full employment in the neoliberal era, but it's not what full employment was supposed to mean.

Skilled migration and employee share schemes will be key to solving the skills shortage, say company directors who warn it has become the biggest problem for business by far ahead of the Prime Minister’s September job summit.

Transurban director and former CEO of MLC Peter Scott is among 80 per cent of top directors who warn attracting and retaining skilled labour has become the top concern for business, according to directors surveyed by law firm King & Wood Mallesons in an annual report on boards being released on Tuesday.

He said fixing the migration system should be top of the priority for the summit with Anthony Albanese acknowledging on Monday that the country needed better pathways for workers to seek permanent residency.

“Australia has been a nation of immigrants for as long as I can remember ... it’s the way we are and one of our greatest strengths, but it’s become problematic because organisations just can’t get the skills they need, quickly enough,” Mr Scott told The Australian Financial Review.

“The government has got to get focused on the regulatory environment to get skilled migration back into the armoury of this country,” he said.

Labour and input costs hit fresh records in the latest NAB Monthly Business Survey, while corporate sector confidence slumped below the long-run average despite strong business conditions and forward orders.

Consumer confidence declined for a second consecutive week, falling sharply in NSW, Victoria and Queensland. The falls were driven by concerns about both the economic outlook and household finances amid rising interest rates.

Confidence among mortgage holders has fallen 25 per cent since just before the Reserve Bank of Australia moved to an inflation-fighting footing in May, when it increased the cash rate for the first time in a decade. Reflecting near record high petrol prices, consumer inflation expectations hit a near record high 6 per cent.

“Inflation and rate concerns have clearly exploded in the survey,” NAB director of economics and markets Tapas Strickland said.

He added that the number of people who recalled hearing about inflation in the news had risen to the highest levels since just prior to the GFC.

“The news recall for inflation rose to around 60, its highest since just prior to the GFC.”

Inflation is tipped to hit the highest level in more than 30 years when the June quarter data is released on July 27, bolstering expectations of a third consecutive 0.5 percentage point interest rate rise six days later.

Investment bank Barrenjoey is forecasting annual headline inflation to hit 6.2 per cent over the June quarter, the fastest increase in prices since 1990, and underlying inflation to hit 5 per cent, the highest level since 1991.

In a note to clients, chief economist Jo Masters said she expected underlying inflation – the RBA’s preferred measure because it strips out large one-off price movements – to hit 6.4 per cent on a six-month annualised basis.

“This implies a broadening of inflation pressures, and we again expect every item in this underlying measure to rise in the quarter,” Ms Masters said.

“This broad-based acceleration in underlying inflation is a key reason we
continue to expect the RBA to continue its sprint down a narrow path towards neutral, hiking by 50 basis points in August.”

According to NAB, business labour costs rose by a survey record 3.6 per cent over the quarter to June, with the result coming ahead of the Fair Work Commission’s decision to increase the minimum and award wages by 5.2 per cent and 4.6 per cent respectively which came into effect on July 1.

Input costs also rose 4.8 per cent over the quarter, surpassing the April record of 4.5 per cent, which pushed output costs up 2.3 per cent.

“Price measures in the June survey confirm we are heading for another very strong inflation print for quarter two when CPI is released later this month – possibly as high as 1.5 per cent to 1.6 per cent in underlying terms, which would be the fastest underlying inflation on record,” Mr Oster said.

“Overall, the survey suggests firms are increasingly wary of how the economy will hold up over the months ahead, despite continuing to experience fairly strong conditions at present.”

“Still, reasons for optimism remain – including elevated household savings and a strong labour market – which will weigh against concerns about the impact of inflation and interest rate rises on consumers.”

Households squirrelled away more than $273 billion in savings and offset accounts since the start of the COVID-19 pandemic, and RBA governor Philip Lowe said the bank was watching closely how this money was used.

Consumer spending measured by the Commonwealth Bank Household Spending Intentions Index rose by 0.9 per cent in June to 117.3, though clear evidence of weaker discretionary spending is emerging.

The gain in June was mainly driven by increased cost of goods and higher spending in the transport, education and household services sectors.

Earlier this northern hemisphere summer, I moderated a dinner debate for the New York Stock Exchange with a clutch of esteemed US chief executives. I expected an earnest discussion about inflation, supply chains and the war in Ukraine. But that’s not what I got.

After one CEO asked a question about the merits of hybrid work, the conversation suddenly became highly emotive. A show of hands revealed most CEOs disliked the policy of remote working. Another showed most were only getting their staff into the office for two days a week at best.

Their dilemma was painfully clear. Should they force staff to return by threatening to fire them, as Elon Musk recently did at Tesla? Strongly urge them to return, like Wall Street bosses such as David Solomon of Goldman Sachs? Or take the same route as Tim Cook of Apple, who initially demanded curbs on remote work but was forced to compromise after mass protests?

As the debate raged, it turned this economics dinner into something more like a communal corporate therapy session. “It’s the biggest single issue,” the boss of a Midwest industrial group forlornly said.

Last month, it happened again, this time while moderating a discussion with an earnest consultant from EY. We were supposed to debate macroeconomic issues but as soon as someone uttered the phrase “remote work”, the conversation was hijacked.

Once again, middle-aged executives said they wanted employees to return to the office.

On this occasion, there were also younger workers present, and they were equally vehement that they wanted to work mostly from home. The only exception to this generational divide was one middle-aged software CEO, whose staff had always worked remotely.

The arguments were intense and driven by culture as much as logistics and economics. As a family therapist might say, the debates showed the generations often “talk past each other”. The same words can mean very different things to people because their assumptions clash.

Office socialising

Take productivity. Workers like me who started their careers towards the end of the 20th century assumed offices were more “productive” than home. “Going to work” was synonymous with “going to the office” and was defined in opposition to home, which was linked to time spent not working.

But for anthropologists, this mental split was an anomaly when set against most cultures throughout history. Today’s laptop-wielding workforce seems to underline this. To them, being in an office can seem less productive since “you end up socialising and that stops you doing your job”, as one young banker told the EY debate.

To this, the older generation would retort that conversation is never a waste of time; it fosters teamwork and leads to the unplanned encounters that spark creativity, not to mention the personal contact needed to manage people. I was repeatedly told all this by the CEOs I was interviewing.

But digital natives grew up managing social relations in cyberspace as much as in the real world. The latter does not always trump the former in their eyes; they think “managers just need to learn to manage remotely”, one said.

Office immersion

There is a third key point of tension: apprenticeships. Though the concept is most often associated with blue-collar work in the west, it also mattered for 20th-century white-collar professionals. Today’s established lawyers, bankers, accountants or journalists usually learnt their craft by observing others and through immersion in an office.

This wasn’t just because they needed to acquire technical skills. The key issue was the transmission of culture. Offices were where the younger generation learnt to network, comport themselves at work, manage their time and so on.

In anthropologist-speak, the office was an environment where deeply ingrained rhythms were seamlessly conveyed and reproduced from one generation to another.

Today’s corporate leaders take it for granted that the culture transfer matters, hence the existence of summer internships. But not everyone shares this view, especially when so much else is in flux and many of the older generation are struggling to make sense of an increasingly digital world.

It might prove to be a temporary clash. Another theme that emerged from these debates was that most older executives blithely assume it will be easier for them to put an end to remote work when the summer is over - and if a recession hits.

But this assumption may be misguided too; surveys from groups such as Gallup consistently show most people working from home today expect to continue to do so, most of the time. It is a fascinating moment to be a corporate anthropologist and a nightmare for those CEOs.

While everyone is now obsessed about surging inflation, most people have missed that the big global forces underpinning price spikes are reversing.

Inflation caused by pandemic-induced supply chain disruptions, the war in Ukraine and ultra-loose monetary policy is turning around. The international forces driving the inflation of goods, food, energy and housing appear to be unwinding.

In the past few days, money market traders have started to notice, paring back bets on ultra-aggressive interest rate rises by central banks and pushing down bond yields, partly on concerns about a possible US recession.

Money markets are now pricing in a 3.1 per cent Reserve Bank of Australia cash rate by year-end, down from 4 per cent projected last week.

Former RBA board member John Edwards says: “I suspect inflation is beginning to crest out to the extent that it’s driven by oil and food prices, which are a very substantial contribution.”

 

“I think in the second half of the year there may be a bit more optimism that inflation is not going to continue to increase in quarterly terms.”

Four finance professionals AFR Weekend spoke to for this article – two economists, an equity fund manager and bond fund manager – all agreed.

But their opinions appear to be slightly contrarian, or at least not universally shared among many observers who have jumped on the inflation bandwagon.

A Sydney-based equity fund manager says global inflation will probably subside in the next six to 12 months.

“Out of all the input costs, it’s very difficult to find one that is going up right now,” he says. “Oil is the last holdout, probably because big funds globally all got long at the same time.

“As we speak it’s breaking lower. Everything else is pulling back.”

The easing of the international cost of commodities and raw materials will not immediately show up in consumer prices because of delays in input costs transmitting to the supermarket shelf. Consumer prices will keep rising in the short term.

It was only a few months ago that central banks were arguing high inflation was transitory. Then everyone fretted it was permanent. Perhaps it’s somewhere in between.

Freight rates soften

International freight costs have fallen about 30 per cent from a peak earlier this year. The world’s three-company international shipping oligopoly drove up average rates for a 40-foot container from about $US1500, to $US10,000. Prices have since slipped back to about $US7000, according to the global freight composite index.

“Freight rates are really important for us because we’re a remote, trading economy,” Outlook Economics director Peter Downes says.

Blockages in the supply chain and logistics remain a challenge, especially in China, but President Xi Jinping can’t keep locking down forever, after he is officially reconfirmed as “president for life” later this year – as is widely expected.

Globally, a big jump in soft commodity prices such as corn, wheat, canola, cotton, live cattle, lamb and pork has driven food inflation. After surging, prices for most of these farm products have declined.

Housing and other construction costs jumped because of a surge in the price of building materials and supply chain blockages.

But the international price of hard commodities such as iron ore has eased and copper is trading at an 18-month low. The price of steel and timber, also key construction materials, are way down after blowing out.

Moreover, car manufacturers are ramping back up production and computer chip prices are falling as more supply comes on stream.

“A lot of the supply chain disruption is coming out of the system,” Downes says.

Energy prices key

Energy prices remain volatile because of the war between Russia and Ukraine. Liquefied natural gas prices have fallen since the invasion of Ukraine in February.

US shale oil production is ramping up to help offset boycotts of Russian oil, which appears to be diverting to other markets not imposing sanctions on Moscow.

 

Energy is a big input cost into food, transport and manufacturing – contributing to price changes across the economy. But Brent crude, the global benchmark, was selling for about $US110 a barrel on Friday, significantly below its pandemic-high of $US139 a barrel.

To be sure, there will be lags before the mitigation in commodity prices and other business inputs feed through to the prices of end products.

In fact, the earlier cost spikes are still flowing through and will show up in higher consumer prices in the second half of the year.

For example, the Reserve Bank of Australia expects domestic inflation to peak at 7 per cent by about December – more than double its 2 per cent to 3 per cent target band.

Nevertheless, there are reasons to believe inflation will noticeably fall thereafter.

One is that persistently high inflation can only occur if prices keep going up at the same high rate. If the price of a good flattens out, its contribution to inflation is zero.

Even if prices remain above their pre-pandemic levels but fall from their peak, this is deflationary and subtracts from measured inflation.

Anchoring expectations

Crucial to all of this is ensuring inflation expectations remain anchored. Central banks need to convince the public that the recent major price spikes won’t be repeated.

That is not guaranteed. The credibility of central banks has taken a hit, after they underestimated inflation and their economic forecasts during pandemic lockdowns turned out to be far too gloomy.

Indeed, RBA governor Philip Lowe this week admitted the bank had suffered reputational damage. In an attempt to influence inflation psychology, Lowe is warning against oversized wage increases.

Lowe politely but unmistakably cautioned the Albanese government, unions, workers and business that across-the-board wage increases of 4 per cent to 5 per cent were not sustainable and risked stoking a 1970s-style wage price spiral.

Although he suggested the economy could probably cope with the Fair Work Commission’s 5.2 per cent minium wage rise as a one-off, Lowe stressed that 3.5 per cent wage rises were more sustainable across the economy.

 

Central banks are belatedly racing to crush inflation expectations to prevent the next leg up in inflation from the demand side.

It explains why the RBA and US Federal Reserve are raising rates by 0.5 of a percentage point and 0.75 of a percentage point respectively. Fed chairman Jerome Powell is open to a full 1 percentage point increase at its July meeting.

With central banks seemingly determined to act, bond markets are signalling that inflation may not become as bad as previously feared.

Central banks may not need to tighten quite as much, especially as they front load super-sized rate rises and try to convince the public they are gung-ho about squashing inflation.

Bond yields

Bond yields may have may peaked in the short term. The Australian 10-year bond yield has declined to 3.7 per cent, from a recent high of 4.2 per cent less than two weeks ago.

 

The peak RBA cash rate projected by money markets is now about 4.1 per cent, down from 4.6 per cent.

Nevertheless, reaching a 4 per cent cash rate by year-end as money market investors were betting would require the most aggressive interest rate cycle in Australia’s history, Lowe said this week.

Lowe said it was unlikely, but had the humility not to completely rule it out, given the market’s forecasts have been more accurate than the RBA over the past couple of years.

The backlog for regional skilled worker visas topped 16,400 unresolved applications, with processing timelines blowing out to more than 19 months for half of all potential migrants seeking to come to Australia.

Data released by the Home Affairs Department under freedom of information rules showed 16,467 applications were on hand for the key 887 skilled regional visa stream in March this year, including 300 applications which had been with officials for more than a year.

As the Albanese government works to speed up processing times to help fill a record 423,000 job vacancies around the country, the 887 visa backlog has seen the slowest 10 per cent of all applications taking more than two years to be resolved.

The visa allows new migrants to work and study anywhere in Australia, to sponsor relatives for permanent residency and apply for citizenship themselves.

Home Affairs says it is currently assessing applications submitted before September 2020 for the stream.

A couple who lodged the required paperwork for the 887 visa in January 2021 told The Australian Financial Review on Monday they have heard nothing from the department since.

“We are not considered for many jobs that we have experience in and are qualified for, as we have to be permanent residents or citizens to be considered,” the husband and wife said.

‘Constant source of worry’

“It is a constant source of worry for us as the processing time just keeps getting delayed. It used to get approved in 10 months but is now taking two years plus.

“It is not fair that a simple check on residence for two years and work experience takes 25-plus months.”

The freedom of information data showed 13,232 applications were on hand at the department in March for the skilled independent visa subclass 189 stream. The visa covers invited workers, as well as New Zealand citizens and eligible Hong Kong and overseas British nationals with skills in demand in Australia.

In the period July 2021 to February 2022, Home Affairs approved more than 69,600 applications for partner visas, child visas, skilled workers, and aged parents.

Immigration Minister Andrew Giles said the federal government was working on solutions to fix the lengthy backlog. Public servants have been redirected to visa processing, away from other duties, since the election.

“We’re working our way through the scale of the backlog and thinking about policy options as well as the resource allocations needed to get things moving,” Mr Giles said.

The Australian Financial Review reported this month an $875 million budget cut at the Home Affairs Department is set to further blow out already stretched visa waiting times and heap more pressure on businesses waiting on the arrival of workers and tourists.

The median short-term temporary skilled visa currently takes 83 days to finalise, up from 53 days in March.

One-quarter of applications are taking at least one year to process, while the slowest 10 per cent of temporary skilled visas are taking 15 months to process.

“I’m obviously looking very carefully in the first instance at what can be done in the here and now because I think what business wants and what visa applicants want is quicker processing times today, as well as looking over the horizon to that considered vision, which will link into the jobs and skills summit, the full employment white paper and of course the budget that will be handed down in October,” Mr Giles told ABC radio.

Increasingly, I’m being asked if Australia is headed into a recession – at work, at Saturday sport with my children and over Sunday lunch.

The answer is: we don’t know for sure – certainty in economic forecasting is a privilege rarely afforded. And these are “unprecedented” times. First the pandemic, but then the shocks have kept coming: Russia’s invasion of Ukraine; lockdowns across China; and at home we’ve had rains and floods, a cold snap and unexpected outages at coal-fired power stations.

Consumer confidence has certainly fallen sharply, from 104 at the start of this year to just 86 in June – an index level below 100 means there are more pessimists than optimists. The last time confidence was this weak was in 2020 – we all know what sparked that – and before that, it was early 2009 when we were feeling the aftershock of the global financial crisis (GFC).

What exactly is weighing on people’s minds and is it all doom and gloom?

We’re starting to feel the squeeze on our household budgets. A tank of petrol is more than $100, electricity and gas bills are set to see double-digit increases, the supermarket trolley is noticeably more expensive (even without a lettuce) and now interest rates are on the rise, meaning mortgage repayments need to be factored in. These price increases are largely for essentials, so you have to find savings from the things we like to buy and do: the movies, the gym, holidays, an outfit or a new smartphone.

Adding to the squeeze is the fact that pay packets are not keeping pace with the cost of living despite all the talk of labour shortages and wage increases. Real wages are falling – that is real, it hurts, and it’s making people gloomy. To top it off, house prices are falling in Sydney and Melbourne and expected to fall across the country over the year ahead. No wonder the post pandemic euphoria has faded!

But it really isn’t all doom and gloom – even though that may be how it feels. Indeed, research after the GFC found a lasting “dread risk”, there is a more pervasive response to bad news than good news.

The unemployment rate is at 3.9 per cent – a level not seen since the early 1970s. Jobs growth has been predominantly full-time and inclusive of females and young Australians. Take a moment to sit with that, it’s unquestionably good news. And the household sector overall is in healthy financial shape; cash savings have risen $250 billion since the pandemic began and the household savings rate – or flow of new savings – is high at 11.4 per cent of disposable income, compared to around 5 per cent pre-pandemic. Further, household net wealth has risen by $3.6 trillion since the end of 2019, largely due to property prices.

Taken together, these cash savings and net wealth increases will provide a buffer for households until the economy gets on a more even footing. So while the current squeeze on the household budget is tough, the hope – no, expectation – is that people will lean on these savings and build-up in wealth to support spending until inflation moderates, wages lift and hopefully productivity too. Remember it is productivity gains that deliver a sustained rise in real wages.

And these savings buffers – together with continuing elevated commodity prices – is why, at least in my opinion, a recession is a low probability for Australia.

Growth will slow – it may even halve from last year’s 4.2 per cent rate – and price pressures, even if all goes well, will take time to moderate while wages are taking time to lift. So, it’s not going to be easy, but we’re not likely to hit a brick-wall either.

For me, the key is jobs. Jobs are how we feel a recession – it’s not through GDP data, it’s when we lose a job, the person we rely on loses a job or our neighbour or colleague loses their job and that leaves us feeling insecure. While the technical definition of a recession is two consecutive quarters of economic contraction, many economists, myself included, prefer a broader definition that includes an increase in unemployment.

All the leading indicators suggest the economy will continue creating jobs and the unemployment rate can remain around current levels. Job vacancies are 186 per cent higher than pre-pandemic, and there are now seven job vacancies for every 10 unemployed people, compared to three before the pandemic. The latest ABS business survey revealed that around one-third of all firms surveyed expected to increase staff numbers and wages in the next three months.

I don’t want to downplay the economic challenges and risks to the economy. The Reserve Bank governor described only a “narrow path” to moderate inflation without triggering an economic downturn. There’s a fine line between things going wrong or going right and we, as individuals, have a role to play because if we get stuck in an inflationary mindset we could see a wage-inflation spiral. That’s not an economic outcome that anyone wants.

Jim Chalmers has told households that inflation will get worse before it gets better and interest rates will continue to climb after the Reserve Bank announced a 0.5 percentage point increase in the cash rate, adding $200 a month to a $750,000 mortgage.

The Treasurer called for households to show “characteristic Australian resilience’’ after the RBA’s third rate hike in as many months which have taken official rates to 1.35 per cent from 0.1 per cent.

RBA governor Philip Lowe flagged more pain ahead for mortgage holders, saying the board ­“expects to take further steps in the process of normalising monetary conditions in Australia over the months ahead”.

Dr Lowe said strong demand, a tight labour market and capacity constraints justified a second consecutive double rate hike – the sharpest monetary policy tightening since 1994.

“The size and timing of future interest rate increases will be guided by the incoming data and the board’s assessment of the outlook for inflation and the labour market,” he said.

Anthony Albanese, returning to Australia from a NATO meeting in Madrid and a visit to Ukraine said families were “doing it tough” and argued the increase in the official cash rate was “another blow”.

“We have plans to deal with cost of living pressures – plans for cheaper childcare, plans to roll out cheaper energy … But also the support that we’ve had for minimum wage increases,” the Prime Minister told 6PR radio.

“We supported the … low and middle income tax offset measures that came into being just this week, on the first of July. That of course will put more money into the pockets … of low and middle income wage earners.”

Although there are growing fears that rapid-fire rate hikes in Europe and the US will trigger recessions, Dr Chalmers said the Treasury and Reserve Bank did not predict that higher rates would drive the Australian economy into reverse.

“The way I look at it is that our economy is growing, but so are our challenges,” the Treasurer said. “I am confident in the long-term prospects for the Australian ­economy so long as we do our best to manage together this difficult combination of circumstances.”

Ahead of a full economic update when parliament returns later this month, Dr Chalmers revealed Treasury anticipated that inflation would moderate in 2023.

“A number of our challenges in the economy will get harder before they get easier, but they will get easier,” he said.

“Inflation will get worse before it gets better, but it will get better. We have to navigate some really tricky conditions in the near term (but) I am confident that a better future and better days lie ahead.”

Dr Chalmers said the up­coming jobs summit – due to be held in late September – would be focused on addressing the chronic shortage of skilled workers, and the ­Albanese government was not ­ruling out an increase to the 160,000 annual cap on the number of permanent skilled migrants.

“In addition to training and childcare and other options, ­obviously migration has got a role to play,” he said.

Economists said they expected a further half a percentage point move when the Reserve Bank meets next month, and that the key cash rate would reach 2.35 per cent by the end of this year, before pushing to 2.6 per cent in early 2023.

AMP Capital chief economist Shane Oliver said the RBA’s back-to-back jumbo rate hikes were consistent with the stepped-up pace of tightening from central banks in New Zealand, Canada and the US recently “as they all try to get ahead of the surge in ­inflation and to contain inflation expectations”.

“This and the low starting point explain why the cash rate is being increased at the fastest pace since 1994,” Dr Oliver said.

Australian Industry Group chief executive Innes Willox warned that higher borrowing costs would compound the pressures facing industry, and called on the RBA to take a measured approach.

“If we raise rates too rapidly it could crunch business and consumer confidence, at a time when businesses are struggling with large wage increases, labour and skills shortages and rising energy costs,” Mr Willox said.

“This emphasises the importance of addressing supply constraints across the Australian economy. Productivity-raising reforms and resuming skilled ­migration are essential in this ­inflationary environment.

“It is also critical that the recent large increase in award wages does not flow more broadly into wages and add to inflationary pressures that lead to even higher interest rates.”

Experts said banks were sure to pass on the official RBA move in full to variable home loan rates.

After Tuesday’s increase, a household with a $750,000 loan would pay $500 more in monthly interest since April when the RBA cash rate was at a record low of 0.1 per cent, according to RateCity analysis.

Dr Chalmers said: “We do ­appreciate that the skyrocketing cost of essentials like groceries and petrol and electricity, and other essentials as well, is putting extreme pressure on household budgets – and that this interest rate rise today will add to the pain that people are feeling”.

The Treasurer would not ­commit to any additional and ­immediate cost-of-living relief in the October budget, beyond ­implementing pre-election commitments such as a large boost to childcare subsidies from mid-2023, and a $12.50 reduction in the cost of prescription medicines from the start of next year.

Dr Chalmers reiterated that motorists should not expect the 22.1c-a-litre petrol price excise cut – implemented by the previous Coalition government in the March budget – to continue beyond its September end date.

“Our ability to respond to a lot of these challenges is constrained by the fact that there is a trillion dollars of debt in the budget and we need to take that challenge seriously,” he said.

Inflation has surged to a multi-decade high of 5.1 per cent over the year to March, supercharged by a massive increase in fuel costs. Cost-of-living pressures have since been compounded by ­another lift in petrol prices, an east coast power crisis, and most recently another devastating NSW flood that is set to drive food prices even higher.

With the squeeze on household finances intensifying, Dr Lowe highlighted that “one source of ongoing uncertainty about the economic outlook is the behaviour of household ­spending”.

The ASX board of directors has chosen an internal candidate, Helen Lofthouse, to replace Dominic Stevens as the new chief executive of the $16 billion equities market operator.

The appointment, which is due to be officially announced on Thursday, follows a four-month international search.

Lofthouse, who joined the ASX in 2015, is being promoted to the top job from group executive, markets, a position she has held since July last year.

Her priority is likely to be a review of the status of the $250 million CHESS clearing and settlement replacement project, which was started in 2016 and has been delayed four times.

Replacing the 28-year-old CHESS system with a blockchain-based distributed ledger technology (DLT) is designed to protect the smooth operation of the $2.7 trillion Australian equity capital market and open up growth options for the ASX.

Lofthouse is the first woman to run the ASX since it was founded in 1987 through the merger of all the state based stock exchanges. Also, she is the second woman to run an exchange in the 150 years of stock market trading in Australia after Ann Bowering who ran the National Stock Exchange from 2016 to 2019.

The ASX board’s nomination committee, headed by former KPMG chairman Peter Nash, began the search for a new chief executive in February this year following the sudden retirement of Stevens. The board sought help from consultants Egon Zehnder.

It is believed that ASX chairman Damian Roche, who was on the nomination committee, flew to New York about three weeks ago to interview an international candidate, believed to be NYSE director Stacey Cunningham.

Tough job

It could be argued that Lofthouse, who is now responsible for ASX’s cash and derivatives trading, international business development, and OTC clearing, is taking on one of the toughest CEO jobs in the market.

Although the ASX has some of the highest gross profit margins of any major listed company at about 70 per cent, it faces a number of challenges to its core business.

These include the de-equitisation of the sharemarket caused by a rush of private equity takeovers, a dearth of initial public offerings thanks to the COVID-19 pandemic and no obvious growth opportunities beyond the blockchain-based opportunities from the CHESS replacement.

The ASX’s recent financial performance has improved thanks to increased interest rate futures trading on the back of higher official interest rates.

It is possible the real-time share settlement promised through the CHESS replacement will disrupt a range of established equity market services including registries and custody.

Her appointment fits with the demands made by shareholders in ASX in conversations with Mr Roche.

One shareholder who did not want to be named said the last thing he wanted to see was the appointment of a CEO with a purely IT background.

“We want a CEO who truly understands the operations of the ASX and what this new platform is going to provide to the ASX,” the shareholder said.

“That is very much a business orientation including an understanding of the linkages in the markets and the synergies between various players that can be achieved through the blockchain technology.”

The shareholder said he had conveyed his disappointment to Mr Roche that Mr Stevens had decided to retire and not see through to the go-live date for the CHESS replacement.

The April 2023 go-live date for the CHESS replacement was scrapped in May this year, but the ASX is yet to tell market participants when the project will be operational.

More cost blowouts

Tim Hogben, the executive in charge of the project, told the annual Stockbrokers and Investment Advisers Association annual conference in Sydney last week that the project was on track.

He likened it to being at the equivalent of “the 80-metre mark of a 100-metre sprint”.

He said ASX was awaiting the final drop of code for the system. Also, he said the distributed ledger that sits under this is processing test transactions at speeds not experienced before in Australia.

He provided a possible window for the new go-live date when he said it would be somewhere between June 2023 and April 2024.

The ASX has been spending about $70 million to $100 million a year on technology investments, and it is believed about 70 per cent of that goes into the CHESS replacement.

This suggests the $250 million cost estimate will blow out to more than $300 million.

An ASX spokesman said: “ASX is searching for a new CEO. We will make an announcement to the market at the appropriate time.”

Businesses should concentrate on pleasing their highest-value “crown jewel” customers rather than chasing market share as inflation hits consumer demand and rivals try to poach their most productive workers.

That is the view of David Orsmond, a professor of economics at Macquarie Business School, who said most executives had never operated in an economy with persistent labour shortages.

He outlines a margin-preserving strategy that major consulting firms, always ahead of the curve on the latest business trends, have already applied to their operations even as they advise their clients to follow suit.

Consulting giant Deloitte, for example, focuses its advisory efforts on its Global Crown Jewel/Global Strategic program made up of the firm’s largest and most important clients, such as miner BHP, carmaker Ford and telecommunications company Telstra.

“We’re no longer in a situation where companies can say, ‘Let’s try to take as much market share as we can, and we’ll just employ the additional people we need to meet that demand,’” Professor Orsmond said of the tightest job market in almost half a century.