Fresh official labor data released this week has laid bare the deepening economic underperformance of Victoria, Australia’s second-most populous state, which is now dragging down national employment metrics and amplifying fears of additional interest rate hikes that could further strain household budgets across the country.
Data published by the Australian Bureau of Statistics (ABS) on Thursday showed Australia’s overall unemployment rate held steady at 4.4% for the second consecutive month, defying forecasts of a small uptick. But beneath this stable national headline, Victoria’s labor market tells a far grimmer story: the state’s unemployment rate currently sits at 5.1%, a full 0.7 percentage points above the national average. To make the disparity starker, nearly one-third of all unemployed Australians – a total of 200,000 people – now reside in Victoria.
Independent veteran economist Saul Eslake explained that Victoria’s drag on the national economy has been building for decades, a trend that predates recent state Labor governments but has worsened significantly under current leadership. “If you strip out the boost to headline gross domestic product growth that comes from Victoria’s faster population growth, the state has underperformed the rest of Australia for a long time,” Eslake told Sky News. “Over the past 20 years, Victoria has slipped from being one of Australia’s wealthiest states to now ranking as either the second or third poorest, depending on the metric you use.”
Eslake added that per capita household disposable income in Victoria is now lower than the figure recorded in Tasmania, with only South Australia recording a lower income level across the country. He also noted the state has become increasingly reliant on federal Goods and Services Tax (GST) redistribution revenue to prop up its ailing public finances and sluggish growth.
The weak jobs numbers have reignited political pressure on Victorian Premier Jacinta Allan, just three months out from the state’s November 28 election. Unconfirmed public rumors have circulated that Allan could face an internal leadership challenge as early as next week, when the state parliament reconvenes for its final sitting before the poll.
Beyond the state-level political and economic impacts, the uneven labor data has reinforced market and analyst expectations that the Reserve Bank of Australia (RBA) will move to raise interest rates further to combat persistent inflation, with some experts warning the hikes could hit Victoria harder than any other state.
Warren Hogan, managing director of EQ Economics, warned that Victoria and New South Wales are the two most vulnerable state economies to additional monetary tightening, due to their high concentrations of mortgage holders and elevated household debt levels. Hogan projects that the RBA could implement up to three more rate hikes, adding a total of 75 basis points to the official cash rate and pushing it back above 5%.
“Victoria already has a soft economy, and the state government’s massive and expanding footprint is impacting every sector,” Hogan said. “If we see multiple rate hikes, this state will get hit extremely hard.” He added that ongoing high government spending across Australia has added to inflationary pressures: national government spending has grown at roughly 3% annually, outpacing the economy’s potential growth rate of around 2%, eliminating a key potential source of relief for inflation.
Over the past two years alone, Victoria’s unemployment rate has climbed by almost two percentage points, rising from a low of around 3.25% to its current level above 5%, Hogan noted.
Cameron McCormack, senior portfolio manager at global investment firm VanEck, echoed the expectation for more rate hikes, forecasting at least one additional increase before the end of 2024, with a significant chance of two hikes. He explained that the resilience of the national labor market is keeping wage and inflation pressures elevated, removing the RBA’s incentive to pause rate hikes.
“Australia’s labor market is refusing to cool, which means it isn’t giving the RBA the breathing room it needs to hold rates steady,” McCormack said. “With the labor market remaining close to full employment for a second straight month, the RBA has clear room to focus squarely on taming inflation.”
He pointed to two key additional inflationary pressures: the 4.75% increase in minimum award wages that took effect this month, and the recent sharp rise in global oil prices. Labor-intensive service sectors such as hospitality and restaurants are already starting to pass higher wage costs through to consumers, McCormack said, and if energy and wage pressures begin to feed more broadly into core inflation, the RBA could pull forward its next rate increase.
Looking at the fine print of Thursday’s jobs report, national employment actually rose by 76,000 positions in June, though 47,000 of those new roles were part-time positions, while 13,000 full-time jobs were lost. The unemployment rate held steady rather than falling only because the labor force participation rate – a measure of how many working-age people are active in the labor market – rose 0.3 percentage points to 67%, expanding the pool of people counted as unemployed.