Australia is on a job creation streak rarely seen before.
According to the ABS, employment rose by 34,700 in seasonally adjusted terms in December, more than doubling the 15,000 increase that had been expected by markets.
Over the year, it surged by 403,100, equating to an average increase of 33,600 each and every month.
That was the fastest growth over a calendar year on record, and the second fastest over any 12-month period, only surpassed by a 409,300 increase in August 2005.
At 15 consecutive months in a row, the current streak of job gains is also the equal longest on record.
And while Australia’s unemployment rate did lift to 5.5% from 5.4% in November, that was largely due to more people actively looking for work.
Labour force participation — measuring Australians of working age who are either in or seeing work — rose to 65.7%, the highest level in seven years.
That’s a clear sign that the labour market is improving.
While another solid jobs report, financial markets have taken the lift in unemployment as a negative for wage pressures, selling down the Aussie dollar a touch and bidding up government bond futures following its release.
Now that markets have had their say, it’s time to see what the economists have made of it all.
In particular, whether the increase in employment or unemployment is more significant when it comes to the outlook for interest rates.
Let’s find out.
Gareth Aird, Commonwealth Bank
The final employment report of 2017 completed a phenomenal calendar year of monthly labour force releases. The big lift in employment over December once again bettered consensus, and once again the underlying detail was robust.
Labour market outcomes in 2018 will be critical to the timing of any potential move in the cash rate. Wages growth should gradually lift as underutilisation continues to recede, and this should put some mild upward pressure on inflation and inflation expectations.
As such, a first rate rise since 2010 looks probable this year. Indeed, current market pricing implies a greater than 50% chance of a rate rise by August 2018. We think that policy tightening will ultimately take a little longer to arrive and have pencilled in Q4 for a hike.
Felicity Emmett, ANZ Bank
The labour market clearly remains in great shape, with another strong gain in employment in December confirming that underlying momentum in the economy remains solid. Encouragingly, the rise in the participation rate to a near record high suggests that the strength in the labour market is pulling more workers back into the labour force. This is good news. While this will support nation-wide household income, it also suggests that it may take longer for labour market spare capacity to be eroded and average wage growth to pick up.
While we expect some moderation in jobs growth over the next few months, we continue to see downside risks to the unemployment rate.
Ben Jarman, JP Morgan
For the RBA, unemployment is the most important signal from this survey, given it is their best monthly indicator of inflation pressure, and will reconfirm that spare capacity is likely to remain until the economy can pick up to above trend growth. The fact that average hours worked were down 0.5% over the month and are flat over the last year sends a similar message.
Tailwinds from stronger global growth have left market local participants itchy to price greater prospect of RBA hikes into 2018, on the view that employment has already strengthened a lot, and another such result today adds to the sense that a significant decline in unemployment will occur soon.
We on the other hand have emphasised the highly correlated nature of participation and employment swings, particularly in the last few years, which tend to neutralise each other, as seen again today. The participation rate rose again from 65.5% to 65.7%, and is now nearly 1%-pt higher over the last year.
This, of course, is the same period over which employment growth has surged from below 1%o per annum to 3.3%. Over 2016/17, around 85% of the variation in employment growth is accounted for by these participation swings, with the remainder being due to changes in unemployment and population growth.
Ivan Colhoun, National Australia Bank
400,000 jobs created over 2017 — 300,000 of them full-time!
The strength of employment growth is very good news and with employment now growing at 25,000 a month in trend terms [it suggests] the unemployment rate should head lower this year.
[It’s] an encouraging report for the economy, government and RBA. We’ll need to see some further declines in unemployment and underemployment, but if they are forthcoming, wages growth should begin to lift and the RBA will likely be able to remove some monetary accommodation during 2018.
NAB continues to look for a half a percent increase in Australian cash rates in the second half of this year.
Sarah Hunter, BIS Oxford Economics
Moving through 2018 I expect to see employment growth slow. Given the underlying population dynamics, employment can sustainably grow by 1.5-2% per annum. And the labour market has run well ahead of output in recent months, with economy likely to have grown by around 2.2% in 2017.
Consumer spending is still subdued and housing construction activity is set to turn down this year, both of which will weigh on jobs growth. Given this, I expect growth in employment to significantly slow to around 1% per annum by the end of 2018, and for the unemployment rate to stay around 5.5%.
Callam Pickering, Indeed
Although this was another excellent jobs report, there is still much progress to be made. Labour market slack remains elevated, which helps to explain the ongoing weakness in wage growth and the cautiousness of Australian households. We believe that there is reason to be optimistic on wages, particularly now that businesses are cashed up and some report a greater difficulty in finding new staff, but improvement could be slow.
The Reserve Bank would naturally be pleased with today’s outcome. Much of the improvement in the labour market during 2017 was a surprise for policy-makers. Nevertheless, with wage growth and inflation so low, tighter monetary policy will not come into the RBA’s near-term calculations.
Paul Dales, Capital Economics
Looking ahead, the various leading indicators almost unanimously suggest that the labour market will strengthen further this year. Admittedly, the current heady rate of jobs growth of 3.3% won’t be sustained [with] an easing to around 2.0% on the cards. But the unemployment rate will probably continue to edge lower. Some of the evidence, such as January’s Westpac consumer confidence survey, suggests there is even a possibility that the unemployment rate will fall as far as 5.0%. That would leave it in line with the RBA’s estimate of the natural rate.
Of course, the underemployment issue means there is more spare capacity than the unemployment rate suggests. And other factors have reduced the link between capacity and wages. So despite the stellar performance of the labour market in 2017, we don’t think wage growth will rise much this year. To us, that means interest rate hikes are a story for 2019 rather than for 2018.
Stephen Walters, Australian Institute of Company Directors
One takeaway is that previously anxious households seem to be responding to the improving conditions in the physical labour market, even if faster wages growth remains elusive. Indeed, yesterday’s Westpac consumer confidence reading for January rose for the second straight month to a four-year high, with optimists again outnumbering pessimists. This supports our assertion that physical jobs growth, which has been booming, matters more to households than the sluggish, sub-inflation, rate of wages growth.
Annette Beacher, TD Securities
A strong labour market is not new news for the markets. For the RBA to shift off its neutral perch, we need to see a meaningful pickup in wages and inflation. We expect the December quarter core CPI reading to reach 2%, back within the 2-3% target band after two years below, and for wages growth to keep grinding higher.
he doves will no doubt highlight that there is still “spare capacity” in the labour market. As we’ve highlighted for a while now, underemployment is entirely a “youth” issue and the RBA wielding the cash rate is highly unlikely to assist in reducing excess capacity in this space.
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