‘BEAUTIFUL SET OF DATA’: What economists are saying about Australia’s stellar jobs report

Mike Hewitt/Getty Images
  • Economists agree that Australia’s jobs report was strong.
  • None believe the report will have near-term implications for official interest rate settings from the RBA.
  • Most point out there’s still an abundance of underutilised workers, a factor that looks likely to keep a lid on wage pressures for the moment.

Australia’s jobs market continued to strengthen in October with employment jumping by 32,800, well ahead of expectations for a smaller increase of 20,000.

Full-time employment surged by 42,300, leaving the increase over the year at a mammoth 238,800.

There’s now a record number of Australians in employment.

And while the unemployment rate didn’t fall, it didn’t increase either, leaving it at the lowest level in over six years.

The reason for the steady unemployment reading was also good, driven by an increasing number of Australians actively looking for work.

However, despite booming jobs growth and unemployment sitting at the lowest level since since early 2012, broader measures of labour market slack — underemployment and underutilisation — still remain at elevated levels, pointing to the likelihood that soft wage pressures will persist in the period ahead.

When it comes to receiving significantly larger wage increases, and the potential for RBA rate hikes, the elevated level of underutilised workers will need to diminish further, potentially significantly given the evidence seen abroad.

In an otherwise stellar report, it was the one area of disappointment.

The question so many are now asking is when will stronger labour market conditions translate to bigger wage increases?

Here’s a selection of economists’ views we’ve received following the jobs report.

Kaixin Owyong, NAB

No doubt about it, today’s labour market report is a strong one. Employment was stronger than expected, the overshoot coming from a rise in full-time employment. Added to that, the unemployment rate was steady at last month’s surprise 5.0%, while the participation rate ticked up. It’s clear labour market conditions remain robust; and solid employment growth is eroding spare labour market capacity. Last month’s fall to 5% appears to be no statistical fluke.

Today’s outcome is likely a welcome surprise for the RBA, providing further confidence that an overall improvement in labour market conditions is taking place. Reduced spare capacity is consistent with its forecasts for above trend economy growth; and gives the Bank space to focus on wages/inflation. Going forward, some leading indicators suggest employment growth will remain solid, but a little softer, after a period of elevated recruitment activity.

Belinda Allen, CBA

Today’s labour force report was an all round great set of numbers. When combined with yesterday’s Wage Price Index data it reinforces the improvement in Australia’s labour market, helped by above trend economic growth.

The recent data is consistent with our view that the next move in interest rates is up. The production and activity side of the Australian economy continue to perform well. On the price side, inflation does remain low, but is still expected to rise gradually. Wages based on yesterday’s data is rising. The stronger labour market conditions in New South Wales and Victoria should help buffet the weakness in housing.

Watching both consumer sentiment and consumer expenditure in these states will be crucial to see if spill overs from dwelling price deflation seep into the broader economy.

Su-Lin Ong, RBC Capital Markets

The only wrinkle in this beautiful set of data was the static underemployment rate. We are encouraged by today’s data but would make some cautious observations.

Firstly, underemployment remains elevated and slack remains. The average underemployment rate in the post inflation targeting era is 7% with the long run average 5.9%. Continued strength in employment will assist but the absorption of this excess capacity will take time.

Secondly, we are less sure GDP will be as strong as the RBA expects with some moderation likely to also temper the pace of employment generation.

Thirdly, the international experience would suggest that full employment, including near historic lows in underemployment is no guarantee of sustained higher wages and inflation.

The RBA will be pleased but will also likely be patient on the policy front.

Tom Kennedy, JP Morgan

The consolidation of the unemployment rate at 5% indicates last month’s drop was not a statistical anomaly and instead consistent with a material improvement in the labour market.

For the RBA, the recently released Statement on Monetary Policy (SoMP) saw the Bank lower their unemployment rate forecasts across the horizon, with the Bank now expecting the u-rate to remain at current levels until end-2019. As a result, we don’t see any immediate implications for monetary policy following today’s print.

That said, the momentum in the data suggests the risk is toward further declines in the unemployment rate, with a sustained fall through our estimate of NAIRU (5%) likely to create some upside risk to the Bank’s wage growth and core inflation forecasts.

Marcel Thieliant, Capital Economics

The unemployment rate remained at a six-year low in October and will probably fall a little further over coming months. However, we still believe that wage growth will only accelerate slowly, for three reasons.

First, we think that the natural unemployment rate is around 4.0% instead of the RBA’s estimate of 5.0%. That reflects the ageing of the workforce and higher education levels as well as improved job-matching via the internet.

Second, 8.3% of all employees still work fewer hours than they would like to and the underutilisation rate remained rather high at 13.3%.

Finally, the structural forces that have kept a lid on wage growth in all advanced economies, including globalisation and technological progress, are unlikely to go into reverse.

All told, we think that wage growth will only reach 2.5% by 2020. So even if the unemployment rate falls a little faster than we anticipate, we suspect the RBA won’t raise interest rates until end-2020.

Shane Oliver, AMP Capital

Continued solid growth in jobs and total hours worked will benefit consumers through higher aggregate household income, as well as boosting consumer sentiment. However, the still large amount of labour market slack means wage inflation pressures will remain weak.

Meanwhile, the Australian consumer continues to face headwinds due to the ongoing housing market correction and a savings rate that is already extremely low.

As result we remain of the view that the RBA won’t start raising interest rates until 2020 at the earliest, and given the housing related downturn, there is a significant chance that the next move could turn out to be a rate cut.

This would be unlikely before second half next year as it will take a while to change the RBA’s relatively upbeat thinking on the economy and rates.

David Plank, ANZ

While a number of labour market indicators have eased a touch, the general message they are sending is still one of ongoing job gains and a gradual move lower in the unemployment rate. The October data are consistent with this story and help to explain, among other things, the continued resilience of consumer sentiment despite a number of negative factors such as the weakening housing market and equity market volatility.

We don’t think the employment report has any implications for the RBA, other than reinforcing the Bank’s bullish outlook.