Rate rises could weaken regional labour market

Are you anticipating any change to interest rates?

Dr Kim Houghton: "I would expect it to be heading upwards in stages over the rest of the year. It's hard to predict exactly which month will lead to which level of rate rise but I think along with all other economists we are expecting it to keep trending up this year.

"Broadly I'm expecting it to end up at about two per cent to three per cent representing what the bank (RBA) would see as a fairly neutral position. I think it's been artificially low now for a long time and I think the RBA has made it pretty clear that it's looking to get back to two per cent to three per cent levels. When it does depends on month-to-month factors but I think that's where they are heading."

[ED note:The current official cash rate as determined by the Reserve Bank of Australia (RBA) is 0.85%.]

Is the Reserve Bank trying to subdue inflation?

"Rate rises are a fairly blunt instrument to subdue inflation. I know there has been a lot of discussion here and overseas whether inflation is driven by an overheated economy which might respond appropriately to a rate rise or whether inflation is driven by supply side issues which will respond quite differently to a rate rise.

"My personal view is that a big component of inflation is currently on the supply side. We've had increasing costs of distribution, increasing costs of raw materials, increasing costs of energy. These are not signs of an overheating economy, necessarily."

Is Australia's economic situation unique?

"You've got similar broad economic conditions in the US and Europe but they seem to have had more inflation for a longer period than us and wage rises going at the same time. We've had this strange mix of very low wage increases alongside the price increases. It doesn't really feel to me like the overheating we had 25 years ago.

"I'm a little sceptical that it is all driven by an overheating economy and that it should respond to a rate rise. But what I'm deeply concerned about is this house price spike that is predominantly a regional story...There's more to be gained by slowing down that rate of regional house price increase through an interest rate rise."

What impact will current economic conditions have on regional employment?

"Australia has been a bit short on business investment in the past two or three years. We know that while profitability has been high businesses have not been reinvesting so much.

"What worries me a little bit about these rate rises is that it might make businesses more cautious about investing in their own businesses. Money will cost a little more if they have to borrow. So that could take some of the strength out of the regional labour market which has been growing really strongly."

Is business investment growing in regional Australia?

Dr Kim Houghton: "We have a record number of job vacancies in regional Australia. 86,000 last month alone. That's well above what it was during the height of the mining boom. Employers have been on a growth path and have been looking for staff.

"There has unfortunately been a natural cap on business growth. We keep hearing stories about businesses which are holding back on their investment and growth potential because they are afraid they are not going to get the staff they need. So that's not a good situation. We want more business investment in regional Australia, not less.

"So at the moment it seems the labour supply challenge is acting already as a break on business growth. My concern would be that further significant rate rises would add to that cap on business investment."

What is the state of the regional economy in the COVID recovery period?

"The regions never went into as much of a dip as the cities. They didn't have as many lockdowns imposed on them, the tourism industry didn't collapse as much as we thought it would. And this increased push for people to go to the regions added another layer of optimism."

What are the emerging pressures on regional areas in the next 12-18 months?

"There's been a big increase in public sector infrastructure spend in the regions which has really strained the system. One of the things is we kind of need this infrastructure wave to wash through the regions and we need to come out the other side because it is constraining other businesses from getting planning approvals on the investment they want to do because there are no planners around.

"We hear it from many regional councils that their staff are struggling to keep up with the demands on them. So we know it's crowding out their ability to support private investment as well. So as that wave works its way through the system we should start to see more labour available. It will take a while for that to wash through because there's a hell of a pipeline of publicly funded infrastructure that's on the way for the regions.

"[The public sector infrastructure spend] is also diverting resources away from housing and that's the other big constraint on regional growth. Folks who are looking for workers literally can't find accommodation for them."

What's the upside?

"There's a great opportunity here to rebuild a good skilled workforce in the regions. There's enough of a pipeline. What we want is more skilled tradespeople and better supply chains [to realise that investment]."