Australian jobless jump a tale of lost riches

Australia's unemployment rate is rising far faster than anyone feared possible as wealth destruction forces would-be retirees to go looking for jobs, a disturbing new trend likely to be repeated across the rich world.

Mix in a rapidly aging population, and the implications are far reaching. Less spending, more saving, slower economic growth, lower inflation, bigger budget deficits and a need for even easier monetary policy are all in prospect.

"The risk is that unemployment now rises a lot further than we expected," said Paul Brennan, head of market economics at Citi. "And there's not a lot policymakers can do about it, given the overwhelming need to rebuild wealth."

For, at heart, this is a tale of lost riches.

Household wealth in Australia fell 10 per cent in the past year, the biggest drop since the 1930s. And that's mild compared to the United States and the UK, where home prices have slumped by far more as the global financial crisis deepened.

US households alone lost $11.2 trillion in wealth last year as property and stock markets fell, the largest drop on record, the Federal Reserve said.

Australia's pension funds suffered because they were heavily exposed to equities, with around 85 per cent of assets in stocks, against 65 per cent in the United States.

Since the main share index is down by 55 per cent in just 14 months, plans of early retirement to a house on the beach seem like childhood dreams.

Already the household saving ratio has jumped to an 18-year high here as people hoard more and spend less. Debt levels are falling for the first time in decades.

"While this is a necessary and totally logical and prudent reaction of consumers, it spells disaster for economic growth," said Stephen Koukoulas, global strategist at TD Securities.

Which was why he believes the Reserve Bank of Australia will have to cut interest rates again as early as April, having skipped a chance to ease this month.

"If stocks remain depressed, the pension performance will continue to drag the economy lower," argued Mr Koukoulas. "This is yet another reason why the RBA needs to ramp up the rate cuts and work to boost profits, and with it the stock market."

The painful re-ordering of household priorities was apparent in Australian labour data released last week.

Unemployment jumped to a four-year high of 5.2 per cent in February, up 0.7 percentage points in just two months even though total employment actually rose slightly.

In contrast, the US jobless rate rose 0.9 percentage points in the same period to 8.1 per cent, but payrolls sank by 1.3 million.

The key was a sharp rise in the number of Australians looking for work. The participation rate, a measure of the labour force as a percentage of the working-age population, climbed to a record high of 65.5 per cent while the number of jobless rose by the most since 1991.

That's strange indeed, as would-be workers usually become discouraged during economic slowdowns and drop out of the labour force. This time, those between 60 and 64 are returning to the labour force in droves, with their participation rate rising four percentage points in January alone.

The retirement age in Australia is 65.

Kieran Davies, chief economist at ABN AMRO, estimates that this trend could add roughly half a percentage point to the overall participation rate.

"The implication is that the unemployment rate might rise by more than we currently expect as fewer people give up searching for work," he said.

Mr Davies had already thought the jobless rate could reach 7.5 per cent next year but the change in behaviour might see the rate approach eight per cent, the highest in over a decade.

And unless wealth rebounded quickly, these people would stay in the labour force, keeping unemployment higher for longer.

The greater competition for jobs would also put downward pressure on wages, meaning workers will have less to spend. That adds to disinflationary forces at a time when the danger of deflation is haunting the minds of many a policy maker.

All of which could put off the day when the RBA starts unwinding some of its recent aggressive easing.

"To us, a persistently high unemployment rate points to persistently low interest rates," said Mr Davies.

The threat of much higher unemployment will put more pressure on the government to provide a bigger safety net while reducing income tax revenues.

Already Australia's Labour government is considering paring back health care refunds and tax benefits for the rich to help support a big increase in pension payments in its May budget.

That augurs ill for an already swelling budget deficit, which will have to be plugged by more borrowing.

There's a sad irony here as it was not long ago policymakers were fretting that the mass retirement of the baby boom generation would leave too few workers, not too many.

The Liberal government at the time held a conference on the phenomena, calling it one of the major challenges of the coming century. It even dabbled in social engineering, offering grants to parents that had more children.

The financial crisis may have solved this particular problem, but not in a way anyone would have wished.