Jobs jolt hits dollar By TIM COLEBATCH Friday 16 March 2001

A sudden jump in the unemployment rate sent the Australian dollar sliding further to a new historic low yesterday, as Opposition Leader Kim Beazley said he feared the country could be heading for recession.

After falling below 50 US cents for the first time on Wednesday night, the dollar stabilised briefly and then resumed its plunge yesterday, falling to 49.23 US cents before rallying in late trade to close at 49.55 US cents.

Yesterday's plunge came after the Bureau of Statistics reported that Australia's unemployment rate increased to 6.9 per cent in February, its highest level since December, 1999. In seasonally adjusted terms, the bureau estimated that Australia added only 2500 new jobs in the month, far too few for almost 30,000 new jobseekers.

The bureau's preferred trend measure shows employment peaked during the Olympic Games in September, then fell by almost 20,000 and has now flattened out. Surveys of employers and job advertisements are predicting more job losses ahead.

The sharemarket also slipped back, although less than had been feared after another bad night on Wall Street, the appointment of a receiver to Joseph Gutnick's Centaur Mining and Exploration, and Coles Myer reporting that its half-yearly profit had slumped by one-third. The All Ordinaries index dropped 22.6 points to close at 3188.4.

Analysts said rising unemployment would boost the chances for a big interest rate cut next month. Dr Chris Caton, chief economist of BT Funds Management, said the figures "increased the likelihood that the interest rate cut coming in early April may be even bigger than 50 basis points". Financial markets have priced in rate cuts of 75 basis points (three-quarters of a percentage point) by August, implying standard home loan rates will fall to about 6.5 per cent.

Mr Beazley, speaking two days before a byelection that is expected to make him odds-on to be prime minister by Christmas, told journalists he had lost his optimism about the Australian economy, and was no longer sure that it would avoid a recession.

"I hope that we're not headed for recession, but there's an awful lot of informed opinion out there that suggests it", he said. "There's no reason why we should be in a downturn now except one: the economic management of this government, and its taxation policy, the GST.

"What our falling dollar represents is that we are not recognised as the knowledge nation that we ought to be ... John Howard has the unique record among industrialised countries (of) presiding over falling investment in new product and ideas and a fall in investment in education."

But Treasurer Peter Costello seized on the positives, noting that the bureau's revised estimates now showed employment as having grown for three months in a row, after falling for three successive months in a row late last year. "Two-thirds of the way into the March quarter, you have to say that employment is making a contribution to growth ... and that is a good trend," he said.

Mr Costello brushed aside the dollar's plunge to below 50 US cents, implying that it would be good for the economy. "An exchange rate decline is actually expansionary," he said. "It works by boosting your exports, and your import-competing sector becomes much more productive."

He said falling exchange rates had the "same effect, really" as a loosening of monetary policy (lowering interest rates).

The unemployment figures confirmed that Sydney is now the epicentre of the downturn. Seasonally adjusted unemployment in New South Wales has jumped from 5.4 per cent to 6.2 per cent in six months, with a net 50,000 jobs wiped out.

Victoria, by contrast, is on the verge of regaining its title as the state with the lowest jobless rate. Victoria's rate in February stabilised at 6.3 per cent, and the bureau estimates the state has kept adding jobs, with a net 38,000 new jobs created in the last six months.

In other developments yesterday:

Reserve Bank board member Dick Warburton took a swipe at foreign exchange markets, saying they had overshot the Australian dollar's true value and that its level did not reflect the fundamentals. Mr Warburton said he believed the plunge reflected a view among fund managers in New York and London that Australia was too small to figure on their "radar screens".

The risks of the federal budget going into deficit increased when the first day's bidding for the third generation (3G) mobile phone spectrum brought top bids totalling just $804 million, compared to the government's estimate of $2.6 billion.

- with AAP

This story was found at: http://www.theage.com.au/news/2001/03/16/FFXAWEPBBKC.html

-- Martin Thompson (mthom1927@aol.com), March 15, 2001

Answers

Budget black hole looms as downturn threatens surplus

By Toni O'Loughlin

The Federal Government's Budget surplus was at risk of being wiped out by a surge in unemployment and a weak dollar, market economists said yesterday.

The welfare bill is expected to grow as dole queues lengthen, while revenue from income tax is set to decline in the wake of this week's job figures showing unemployment rose to 6.9 per cent.

An extra 40,000 adults and more than 11,000 youths have lined up for dole payments since November, Centrelink figures show.

Westpac's chief economist, Mr Nigel Stapledon, predicts slower growth will slice $3.25 billion off the surplus next financial year, mainly due to job losses.

That would send the Budget into deficit of $550 million, given that the Government's most recent figures foreshadowed a surplus of just $2.7 billion after the cut to fuel excise and spending on roads, floods and innovation.

"Unemployment dominates the loss in revenue, it accounts for 70 per cent of the impact," Mr Stapledon said.

The slowdown and an election spending spree is likely to cut the surplus for 2000-01 from $4.3 billion to $3.3 billion.

But even that figure is shaky. The Government is banking on reaping $2.6 billion from the auction of its third-generation mobile spectrum auction.

Bids started coming in this week but none has reached the $1.1 billion reserve price.

Also, Government expenditure - especially on defence, foreign affairs and Ausaid projects, which were budgeted for when the dollar was worth about US60¢ - is at risk of blowing out as the currency continues to plumb new lows.

The Government does not hedge its foreign exchange exposures like most businesses.

Last year, the Audit Office warned in two reports that poor foreign exchange management practices among Government departments were undermining the bottom line.

In 1999-2000 the defence budget blew out by $3 billion due to adverse movements in the currency, while Treasury's debt management practices exposed the Government to an additional $189 million in debt for every 1¢ fall in the dollar.

This financial year the dollar has fallen more rapidly than 1999-2000.

If the Budget does slip into deficit it will stop the Government offering pre-election tax cuts in the May Budget. The Government has insisted the Budget will remain in surplus.

But Macquarie Bank economist Mr Andrew Hanlan said a deficit was not necessarily a bad thing.

"The problem is if you get into large deficits and run them year in ,year out," Mr Hanlan said.

Yesterday there was little relief for the Australian dollar or new data offering hope for an economic rebound.

The dollar hit another record low of US49.02¢ yesterday morning - the fourth this week - and seems destined to sink lower.

The Prime Minister, Mr Howard, defied currency markets, where talk of the dollar slumping to US45¢ is common, saying the fall was unwarranted and would be reversed.

http://www.smh.com.au/news/0103/17/national/national7.html

-- Martin Thompson (mthom1927@aol.com), March 16, 2001.