Households growing concern about job market point to further rate cuts: Westpac

Pessimism about the job market is on the rise and could further curtail already cautious borrowers taking on more debt in 2013, forcing the RBA to cut interest rates even further, according to Westpac.

All the unemployment indicators from the December Westpac-Melbourne Institute survey of consumer sentiment point to a rise in the unemployment rate next year, with the likes of AMP Capital chief economist Shane Oliver tipping the unemployment rate to reach 6% in 2013.

Oliver is tipping the cash rate to fall to 2.5% in 2013 and says it could go even lower if sectors like housing, tourism and retail take longer to recover and take up the slack created by an expected slowdown in mining investment.

Employment is crucial to the housing market in both a practical sense – borrowers need income to pay off their mortgages – and in terms of feeling confident about taking on more debt to renovate, upgrade and in some cases, purchase an investment property.

However, despite the official unemployment rate falling from 5.4% to 5.2% and the RBA cutting the cash rate by 25 basis point to 3% in the week when the December consumer sentiment survey was carried out, job market expectations deteriorated.

As the graph below shows, survey respondents in full-time work (of which many would have mortgages or may be looking to buy) are more pessimistic about the jobs market than those unemployed, retired or not working.

Furthermore, as the graph below shows, sentiment about unemployment is similar across all household types – renters, mortgage holders and those who own their property outright.

Sentiment about the jobs market is weakest in the resource states of Queensland and WA due to expectations of a slowdown in mining-related projects and most bullish in NSW.

“Despite another rate cut and improving sentiment towards housing, consumers remain cautious and particularly concerned around the outlook for the economy and for employment,” says Westpac chief economist Bill Evans.

“The Reserve Bank has two more months to assess the impact of its interest rate moves before its next meeting (the RBA does not meet in January).

“Evidence to date is that low rates are not generating much traction with households. Hence there is likely to be a decision to further ease rates in February or March,” he says.