Australia’s unemployment rate tumbled to 5% last month, the lowest level in over six years.
While that largely reflected a steep decline in the number of working age Australians participation in the workforce, rather than a large increase in employment which rose by just 5,600, the result was still stunning nonetheless — stronger than even the most optimistic forecast offered by an individual economist.
Importantly, unemployment now sits at the level where the RBA estimates that wage pressures will begin to increase, known as the non-accelerating inflation rate of unemployment, or NAIRU for short.
But is it believable?
Markets don’t seem overly convinced with only a modest lift in the Australian dollar and government bond yields following the September release, hinting at a degree of scepticism.
Now they’ve had time to look trough the details, it’s time to find out what economists have made of it all.
We start with Tom Kennedy of JP Morgan who delivered an excellent synopsis of today’s report.
Tom Kennedy, JP Morgan
This result should not be dismissed and should this outcome be ‘locked-in’ in coming months then the market would have to acknowledge that progress toward the RBA’s objectives, which has been very slow for many years, now appears more rapid.
There are also a couple of caveats to the September survey.
First, it appears part of the drop in the unemployment rates owes to the survey’s rotation, with the unemployment rate of the outgoing group meaningfully higher than the broader sample (5.6% versus 4.9%), while the jobless rate of the incoming group was below the group mean at 4.4%. Clearly these dynamics have flattered the headline metrics, but the ABS also notes that the unemployment rate fell in all states and territories, as well as each of the rotation group, making it hard to argue against a genuine improvement in the data.
The second potential asterisk to today’s release is the ABS’ change to surveying underemployment on a monthly basis. While the unemployment question hasn’t changed, previously, seemingly innocuous changes to the survey’s questions have wreaked havoc with the response rates and introduced sample noise in the past. We cannot definitively say this is the case in the September release, though it is worth acknowledging that changes to the survey have historically introduced short-term volatility.
Felicity Emmett, ANZ
The RBA’s latest forecasts have the unemployment rate at 5.5% by the end of 2018 and 5.25% by the end of 2019. The drop in the unemployment rate to 5% in September suggests that the November SOMP will likely see the forecast trajectory for the unemployment rate nudged down to reflect the lower starting point. A forecast of under 5% by the end of 2019 seems likely. We expect that the RBA is, however, less likely to upgrade its inflation forecasts on the back of the improved outlook for unemployment.
Given Australia’s experience to date, and the experience of a number of overseas economies, it is likely that the unemployment rate will have to track below current estimates of the NAIRU for some time before material wage pressures emerge. The Q3 CPI print, due on 31 October, will clearly also be a key input into the RBA’s forecasts and deliberations for the SOMP. Post the SOMP, the Q3 wages data will be the key release.
Su-Lin Ong, RBC Capital Markets
The trend data confirm a labour market in good shape with a decent pace of monthly employment generation, a relatively high level of workforce participation, and a modestly declining unemployment rate. It reflects continued above trend growth for much of 2018. The RBA would have welcomed today’s data which remain consistent with its generally upbeat narrative of the labour market.
Whether this translates to sustained stronger wages growth remains more debatable with the international experience suggesting a period of sub NAIRU and very tight labour market conditions is needed. This demands persistent above trend growth and employment generation and on that front we are mindful of a number of challenges ahead — a likely moderation in housing and consumption, increased political uncertainty that may weigh on business confidence, and weaker global growth.
Despite the encouraging labour market dynamics, these uncertainties are likely to keep the RBA on the sidelines for the foreseeable future.
Shane Oliver, AMP Capital
The rather odd fall in the participation rate in September suggests the 0.3% fall in the unemployment rate to 5.0% is unlikely to be sustained in October.
Continued growth in total hours worked and the fall in the unemployment rate will benefit consumers through higher aggregate household income, as well as boosting consumer sentiment. However, the large amount of labour market slack means wage inflation pressures will remain weak. Whilst we expect wage pressures to pick up gradually, the Australian consumer continues to face considerable headwinds due to the ongoing housing market correction and a savings rate that is already extremely low.
All this means the RBA looks set to leave interest rates on hold till at least 2020.
Kaixin Owyong, NAB
While the RBA has said it looks through month-to-month movements in the labour data, the Bank is likely to be very pleased with unemployment continuing to fall. It’s clear that the labour market is tightening, even if there were to be a slight reversal in coming months — as we suspect at this stage — with the trend unemployment rate at its lowest level for some time.
The participation rate will likely remain volatile, but we continue to expect it to pull back a little after rising sharply over the past year. Today’s data reminds us that it will remain an important determinant of the rate at which the labour market tightens, and how quickly wage growth picks up.
We’ll be watching the labour market data closely in the coming months. Sample rotation did appear to impact the result, with the incoming sample group having lower unemployment, participation and employment than the sample as a whole. Nevertheless, even if there is a slight reversal in the unemployment rate, it is clear the labour market is tightening.
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