- Australian employment growth is slowing noticeably.
- Most economists expect it will be some time until unemployment falls enough to lift wage pressures.
- Most agree that given recent trends, the RBA will be in no rush to lift interest rates.
After a strong period in 2017, it now looks like Australia’s employment growth is slowing down.
According to the Australian Bureau of Statistics (ABS), employment rose by 4,900 in March in seasonally adjusted terms, falling well short of expectations for an increase of 20,000.
It left employment growth over the past year at a still-brisk 367,100. However, it had been as high as 431,000 in January this year.
Underlining the recent slowdown, trend employment growth currently sits at 14,000 per month, around a third of the 42,000 level it stood less than a year ago.
With employment growth now slowing both in seasonally adjusted and trend terms, the number of Australians either in employment or looking for work continues to increase, lifting modestly to another record high in March.
With supply of labour increasing around the same pace as employment, it’s meant that Australia’s unemployment rate still sits at 5.5%, well above the 5% level or below where wage growth is expected to accelerate.
Put bluntly, there’s still jobs being created, just not enough to lower the unemployment rate.
For workers banking on a big pay increase arriving anytime soon, it’s not the best of news. Nor is it for the Reserve Bank of Australia (RBA) who expect lower unemployment to help spur wage and inflationary pressures.
Now that they’ve had time to look through the March jobs report, it’s time to see what economists have made of it.
Is it time to hit the panic button or have we not reached that point just yet.
Let’s find out.
Kate Hickie, Capital Economics
While the modest increase in employment in March was a notable break from the exceptionally large rises recorded over the past year, we are wary about sounding the alarm just yet given most leading indicators remain consistent with decent rates of employment growth ahead.
Given the labour force rose by just 2,500 in March, the unemployment rate held steady at 5.5%. That is still some way above the RBA’s estimate of the natural rate of unemployment of 5.0% and well above our own estimate of closer to 4.0%. There is still quite a lot of spare capacity in the labour market.
Looking ahead, although there has been a modest softening in some leading labour market indicators recently, most remain well above average and don’t suggest that this is likely to mark the beginning of a period of notably weaker employment growth. But even if jobs growth picks-up again in the coming months, given the large amount of slack in the labour market, this is unlikely to generate much of a pickup in wage growth from its current subdued rate of 2.1%.
Diana Mousina, AMP Capital
Despite the low growth in employment over the past two months, the unemployment rate is unchanged at 5.5% because the participation rate has also come down to 65.5% which means that you need less people employed in the labour market each month to keep the unemployment rate flat.
Continued good employment growth will work to bring down the unemployment rate towards 5-5.25% but this will only happen slowly. So, underemployment will still remain an issue in the labour market and will cap wages growth in 2018.
In this environment, the Reserve Bank of Australia will tread carefully and is unlikely to be in a rush to lift interest rates. There are pockets of strength in Australia – business confidence is still positive, non-mining investment growth is rising and infrastructure spending is high. But, the low inflation environment, lots of risks around 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 still some time away. We expect a rate rise from the Reserve Bank in the first quarter of 2019.
Ivan Colhoun, NAB
Employment growth disappointed in March, but is increasingly diverging from NAB’s internal indicator of employment growth and other leading indicators of the labour market. SEEK job advertisements have strengthened, the NAB Business Survey employment question has also lifted, while NAB’s new internal Employment Proxy is now suggesting the Statistician is under-estimating employment growth.
This suggests increased risk that employment will print more strongly in coming months.
The RBA will continue to assess the unemployment rate as indicating spare capacity in the labour market, but given the encouraging signals of other labour market indicators, probably won’t be too worried for now about recent slightly weaker employment growth. That said, there’s little in these data to suggest risk of an early rate rise by the RBA.
Tom Kennedy, JP Morgan
In terms of interpreting the data, we place most weight on the unemployment rate, given employment growth is highly correlated to monthly swings in participation, a dynamic which was particularly pronounced through 2017. The unemployment rate has traversed a very narrow range over the course of the past six months and is only down a few tenths from this time last year.
While tracking our forecast, this stability is starting to challenge the RBA’s SoMP forecast for the unemployment rate to average 5.25% in Q2 2018, a view which may require some adjustment in the upcoming May SoMP.
Much of the positivity RBA officials have had on the labour market of late has come from the fact that employment growth boomed last year, with raw job creation making it easy to paper over the various headwinds facing the consumer, such as benign wages growth and high levels of household indebtedness.
However, we had previously flagged the surge in employment growth and participation as being correlated phenomena. While early days it appears this view is broadly tracking, and we retain our forecast for participation to stabilise and employment growth to moderate in 2018.
Felicity Emmett, ANZ
Employment rose just 5,000 in March although downward revisions to February show that the record run of jobs gains is over. The slowdown in employment growth comes on the back of a very strong run through 2017 and with labour market leading indicators remaining positive, there are still reasons to be optimistic about the outlook for employment and unemployment this year.
Buoyant business conditions and ongoing strength in job vacancies suggest that employment will continue to expand and the unemployment rate should trend lower in coming months.
Stephen Walters, Australian Institute of Company Directors
Looking through the volatility, the main message is that the labour market has started 2018 on an unexpectedly weak footing. Jobs growth has significantly fallen short of expectations so far which, admittedly, were elevated after such a stellar performance in 2017. But, the unemployment rate has stayed broadly flat, owing to pronounced movements of people into and out of the labour force.
All that said, the employment outlook remains positive. Business surveys suggest that most firms still expect to lift hiring this year. Eventually, the participation rate should stop rising, meaning that the jobless rate probably can resume its fall. Ultimately, this should help to boost wages growth from the current near-record lows, as the RBA’s economists have been expecting.
Callam Pickering, Indeed
We consider it too early to declare whether the labour market has taken a turn for the worst — since employment growth during 2017 was clearly unsustainable — but policy-makers will be closely watching the figures. Forecasts for employment and unemployment are a key input in federal budget forecasts and Reserve Bank board meetings.
The Reserve Bank would naturally be disappointed in today’s labour force figures. But they’d also recognise that the strong growth last year wasn’t sustainable. With wage growth and inflation so low, along with plenty of labour market slack, we don’t think tighter monetary policy will come into the RBA’s near-term calculations. We still believe that a rate hike won’t occur until 2019.
Paul Bloxham, HSBC
The new theme in today’s labour market numbers was the downward surprise to the jobs growth number in March and the downward revision to the February figures. Together, these numbers suggest that labour demand could be softening.
However, it is still too early to suggest that this is the beginning of a new trend. In particular, the collection of timely indicators of labour market conditions — such as job advertisements, job vacancies and employment intention components of the business surveys — are suggesting continued strong labour demand.
The other theme in the numbers was the continuation of a previous trend, which is that the strong growth in labour demand over the past year has been met by a rising participation rate, which has meant that the unemployment rate has been tracking sideways for almost a year now. A further fall in the unemployment rate will be needed to see upward pressure on wages growth.
Our central case has employment growth remaining strong, the unemployment rate falling over coming quarters and wage growth lifting. Today’s numbers suggest that the risk is that it takes longer for wages growth to pick up.
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