Australia's stellar run of jobs growth could be about to come to an end

Peter J Fox/Getty Images
  • Australia’s economy slowed sharply in the second half of 2018. Recent economic indicators suggest little has improved in early 2019.
  • While the economy has been slowing, hiring has actually accelerated, helping to explain why the RBA has been reluctant to cut Australia’s cash rate.
  • Westpac Bank and the NAB both expect hiring either stalled or went backwards in February. They expect similar trends to be evident in the months ahead.
  • The median economist forecast looks for employment to increase by 15,000 in February, leaving unemployment steady at 5%.

Australia’s jobs market has been a shining light for the economy amidst a growing list of weakening domestic economic indicators in recent months.

According to the Australian Bureau of Statistics (ABS), employment jumped by 39,100 in January, leaving Australia’s unemployment rate steady at the lowest level since mid-2011.

At 2.2%, annual employment growth is still firm, and being driven primarily by full-time jobs growth.

Indeed, despite a sharp deceleration in the Australian economy in the second half of last year, the pace of employment growth actually accelerated during the same period.

With job vacancies, as measured by the ABS, currently sitting at record highs both in total terms and as a proportion of Australia’s labour force, it helps explain why the Reserve Bank of Australia (RBA) remains confident that unemployment will continue to edge lower in the period ahead, helping to explain why it has been reluctant to cut official interest rates despite growing calls for further monetary policy easing.

As long as that jobs market remains firm, it will allow the RBA to retain its view that inflation will gradually return to its 2-3% target.

According to economists, Australian employment likely remained firm in February with the median forecast looking for an increase of 15,000, a level sufficient to keep unemployment steady at 5% should labour force participation rates remain steady.

However, not everyone believes that Australian employment growth will be able to buck the slowdown seen in the broader economy seen in recent months.

Some, such as Westpac Bank, believe that a shock result may be seen in the February jobs report, predicting that employment likely fell by 5,000 during the month, seeing Australia’s unemployment rate lift to 5.1% as a result.

“Our forecast for February is more about monthly volatility than the start of a new trend,” said Justin Smirk, Senior Economist at Westpac, pointing to the chart below that shows employment has been weak in February over the past two years.

Westpac Bank

Such a result would only be the third month since late 2016 that Australian employment has fallen over a given month.

While Smirk says Westpac’s February forecast is more to do with volatility in the ABS seasonally adjusted data, given recent signals from other leading labour market indicators, he says employment growth looks set to slow sharply in the months ahead, pointing to the likelihood that unemployment will increase to 5.4% in the June quarter of this year.

“There are a number of near term leading indicators we use to get feel for the any changes in the near term direction in momentum in employment such as the Westpac Jobs Index, ANZ Job Ads and Westpac-Melbourne Institute Unemployment Expectations,” he said.

“It is true that these indicators have softened but they are not pointing to a collapse in employment at this stage.

“We believe that employment growth is set to stall through the first half of 2019, in part due to uncertainty surrounding the April Federal election but also some payback for the earlier strength in the labour market.”

Westpac is not the only forecaster looking for weakness in Australia’s February jobs report.

The National Australia Bank is another who thinks an unwelcome result could arrive when the report is released on Thursday.

“NAB expects unchanged employment in February after a sharp rise in January,” economists at the bank said.

“We expect the unemployment rate to remain at 5%, but with risk of a 5.1% print.”

The NAB says the downside risks for employment, and upside risk for the unemployment rate, is partially due to “unfavourable” rotation effects in the ABS jobs survey with the outgoing group having a much higher employment rate than the average of the other six remaining groups.

“At the margin, the effect of this group leaving increases the risk of a 5.1% {unemployment] print.”

However, like Westpac, the NAB says the deceleration in the Australian economy will likely see employment growth slow in the coming months, putting upward pressure on the national unemployment rate.

Previously, the RBA has stated that a sustained lift in Australia’s unemployment rate would be one trigger than could potentially warrant further reductions to the cash rate.

Both Westpac and the NAB, along with a growing list of other economists, believe that such a scenario will play out this year, helping to explain why both bank’s see the RBA cash rate falling 50 basis points by the end of the year.

Financial markets share a similar view, pricing in a full 25 basis point rate cut, with around a 50% chance of a second, by the start of 2020.

While a weakening in labour market conditions will only see expectations for RBA rate cuts grow further, any positive surprises in the February jobs report could also see a reduction in rate cut bets, potentially leading to volatility in Australian financial markets given so much pessimism is already factored in.

One way or another, the jobs report this week will receive plenty of attention both domestically and abroad.

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