Australia’s January jobs report was released today, revealing a 16th consecutive increase in employment, the longest stretch on record.
While a headline-grabber, the rest of the report was more OK than great.
Part time employment jumped, offsetting a large decline in full time workers. Hours worked also dipped for a second straight month, a disappointing result hinting that labour market slack remains in abundance.
And while the unemployment rate did fall to 5.5% from an upwardly revised 5.6% level in December, it still remains well above what many regard to be Australia’s full employment level of around 5% or lower.
Combined, all three suggest there’s little risk of a sharp acceleration in wage pressures any time soon, or indeed a near-term rate hike from the Reserve Bank of Australia (RBA).
Financial markets certainly thought so, barely reacting to the release of the report.
It was largely in line with expectations and didn’t change the outlook for wages or inflation, meaning there was no real reason to do anything else but relax.
While markets made up their mind fairly quickly, let’s see what Australia’s economic community has made of the January report.
Has the status quo been maintained, or was there something in the report that markets missed?
Let’s find out.
Gareth Aird, Commonwealth Bank
The first employment report of 2018 was broadly in line with consensus. Employment lifted by 16,000 which set a record for the longest run of consecutive monthly job gains. The underlying detail was a little bit softer than the headline results implied. But in the context of the big increases in employment over November and December we think that today’s result is a pretty decent one.
Labour market outcomes in 2018 will be paramount to the timing of any potential move in the cash rate. In particular, the labour market will need to continue to tighten and wages growth will need to be on a sustained upward trend before the policy rate moves higher. On the latter, next week the ABS publishes updates on the Wage Price Index (WPI) and Average Weekly Earnings (AWEs).
The Q3 WPI rose by just 0.5%. It was a particularly disappointing result given a solid lift in the national minimum wage of 3.3%, up from 2.4% the previous year, was supposedly in the figures. Some of the business surveys are pointing to a lift in unit labour costs and we expect to see a modest 0.6% increase in the Q4 WPI. Such an outcome would see the annual rate of wages growth step up to 2.1%. And it would be consistent with an expected gradual lift in wages growth over 2018 which is central to our RBA call for a rate rise on Melbourne Cup day. Anything weaker would raise the probability that the RBA spends all of 2018 on the sidelines.
Paul Brennan and Josh Williamson, Citibank
For the RBA, what matters is how labour demand and supply influence wages and inflation and there is little evidence of even nascent wage pressures. We expect another 0.5% quarterly increase in next week’s Wage Price Index.
Assistant RBA governor Ellis earlier this week warned that we shouldn’t draw implications for inflation from any signs of diminishing spare capacity without framing the discussion around how structural and other factors can make a difference to economic behaviour. And her comments suggested that the RBA is keenly aware that structural factors such as increasing competitive pressures from globalisation and technology are weighing on the pricing power of businesses and their appetite to pay higher wage rises.
The earliest we can see the RBA tightening is in Q4, with the risk slanted to later rather than soon.
George Tharenou, UBS
Despite the softer details of the jobs report, the labour market clearly remains strong, with annual employment growth remaining at a post-GFC high of 3.3%. This is supporting housing activity, and if sustained, suggests upside risk to our growth outlook, which could see the RBA hike rates earlier than our forecast first move in 2019.
However, as we highlighted previously, the labour market survey data has clearly ‘broken down’ from ecord low wages, and recent EBA data suggest the underlying momentum of wages is still weakening, despite the minimum wage hike.
Looking ahead, while we still expect solid jobs, today’s report may be the first sign that employment growth will moderate towards the leading indicators.
Next week’s WPI data is key and will be closely watched by the market, particularly given the RBA is likely to remain on the side-lines until there is more evidence of sustained wages growth.
Felicity Emmett, ANZ Bank
Another rise in employment brings it to a record 16 consecutive monthly gains. The drop in full time jobs and the recent stabilisation of the unemployment rate took some of the gloss off the report, however.
Recent stability in the unemployment rate is consistent with the RBA’s willingness to be patient on policy normalisation. That said, leading indicators suggest that employment is likely to grow solidly and the unemployment rate decline over coming months.
Ben Jarman, JP Morgan
Perhaps the most interesting detail of the report is what didn’t happen, which is that participation stopped rising, and this immediately put a pause to the very strong trend of full-time job gains, of labour force and employment growth, and of the rise in the employment/population ratio.
The majority of the variation in employment growth — both weak and strong — has been driven by participation changes since late 2015. We expect this will continue to be the case given the current industry composition of employment gains.
The hours worked numbers similarly show that while breadth measures of employment have picked up through participation effects, labour utilisation is not tightening. Average hours worked are down 2.7% year-on-year, the weakest reading since mid-2009, at the depths of the last slowdown. Some of this may be due to base effects from some erratic moves early last year, but nonetheless it remains clear that hours worked have slowed over the last six months too.
We expect unemployment to hold in a 5.5-5.75% range, due to sub-trend GDP growth and a lack of further employment growth ahead in bellwether sectors. This will weigh on wages/unit labour costs and keep inflation well contained.
Diana Mousina , AMP Capital
The labour market has been running red hot for over six months which does stand at odds with an economy that is running below its potential overall. Looking ahead, our jobs leading indicator (a combination of various job vacancies and business hiring intentions) is pointing to a slowdown in employment growth. Employment growth appears to have reached a peak for now.
Slower employment growth means that the unemployment rate is unlikely to decline significantly over the next few months, which indicates that we will need to wait longer for substantial wages growth to emerge. The Reserve Bank is still counting on wages growth to lift by some extent, but only gradually and this has been clearly outlined in recent speeches and publications from the central bank.
We still see the Reserve Bank keeping interest rates on hold for now. There are pockets of strength in the Australian growth story — business confidence and conditions are very strong, non-mining investment growth is lifting and iron ore price rises are good news for commodity exporters. But, the low inflation environment, risks in the housing market and a high currency will limit growth in the economy this year and keep the Reserve Bank cautious. A rate rise is likely from the Reserve Bank, but its only likely to come at the end of this year.
Ivan Colhoun, National Australia Bank
Sample rotation effects have been very significant in each of the past two months — this month substantially restraining employment growth and lowering full-time employment while boosting unemployment. Even still, there have been 16 consecutive months of employment increases, the longest consecutive run ever.
The RBA will need to see the unemployment rate fall to see some acceleration in wages, which will make it more confident in its inflation and consumption forecasts. That isn’t happening at present, though many partial indicators suggest it will over the course of the year. Wages next week is now the focus — will we get some of the missing minimum wage growth from last quarter?
Paul Dales, Capital Economics
Employment growth will probably slow this year from the current annual growth rate of 3.3% to the 2.0% or so touted by most other indicators. But there is little reason to expect a much more severe slowdown.
We are not particularly concerned by the rise in employment in January being driven by a 65,900 leap in part-time employment while full-time employment fell by 49,800. Over the past year, full-time jobs explain over 70% of the total 400,000 increase in employment.
We are, however, more worried by the falls in hours worked. Employees are on average working 2.7% fewer hours than a year ago. That will limit the boost to household incomes from rising employment and it is consistent with other indications that there is still plenty of capacity in the labour market.
While the continued strength of the labour market will provide at least some support to income and consumption growth this year, without much more wage inflation the RBA isn’t going to raise interest rates. We expect the RBA will keep interest rates at 1.5% until the second half of 2019.
Callam Pickering, Indeed
We shouldn’t dwell on the negatives, particularly given the month-to-month volatility that is always present in our labour force figures. Outside of the ongoing weakness in wages, the labour market story remains bright. Lots of jobs are being created, across a range of industries, and many Australians are re-entering the workforce after a period in the wilderness.
Nevertheless, 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 with some reporting a greater difficulty in finding new staff, but improvement could be slow.
The Reserve Bank would naturally be pleased with today’s outcome. It’s certainly a step in the right direction even though full-time employment fell. Nevertheless, with wage growth and inflation so low, tighter monetary policy will not come into the RBA’s near-term calculations.