- Based on recent statements from the RBA, only a further improvement in Australian labour market conditions will likely be enough to prevent a rate cut in the period ahead.
- Based on the latest batch of Australian PMIs released by the Ai Group, it might not be long until the RBA is called into action.
- Businesses surveyed in April said staffing levels were reduced at the fastest pace in six years, suggesting employment growth will slow in the months ahead.
In the absence of an unexpected acceleration in underlying inflationary pressures, it now appears that only a further improvement in Australian labour market conditions will be enough to prevent the RBA from cutting official interest rates.
According to the chart below from UBS, it may not be all that long until to RBA is called into action.
Shown in black, it’s known as Australia’s “All-economy employment PMI”, a measure of changes in staffing levels based on firms surveyed by the Ai Group as part of its monthly manufacturing, services and construction PMIs.
A figure below 50 indicates staffing levels were cut. The distance away from 50 reveals how fast the decline was.
UBS has weighted the series to account for the size of each sector, meaning the movements are primarily influenced by changes in services industries, the largest employer in Australia.
In April, the employment PMI tanked, falling to the lowest level in six years.
More often that not in the past, movements in the employment PMI have led changes in employment growth, indicated by the blue line in the chart.
If the responses from businesses are on the money in April, employment growth could come to a halt in the months ahead.
Should such a scenario play out, potentially leading to a lift in unemployment depending on changes in participation rates in the workforce, it will substantially increase the risk of a RBA rate cut in the months ahead.
That’s presuming the bank doesn’t change the parameters on what will eventually boost inflation, of course.
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