The reason for the decline in Australia’s unemployment rate, at odds with forecasts offered by the RBA and treasury earlier this year, continues to be debated by the markets.
RBA governor Glenn Stevens attempted to answer that question last week, providing four reasons that may explain why unemployment has topped out far sooner, and far lower, than what many had initially expected.
- The economy is growing faster than what had been previously reported, potentially leading to an upgrade when Q2 GDP data is released next month;
- That Australia’s unemployment data – notoriously volatile – may have been a factor;
- Australia’s trend growth rate may be lower than the 3-3.25% level that many, including the RBA, currently use, leading to the stabilisation in unemployment or;
- Slower wages growth which, despite sub-trend economic growth, is allowing employment growth to remain robust.
All are plausible reasons which could help explain the remarkably resilient state of the labour market, however, there could there be another factor behind the recent decline.
NAB, in a research note released this afternoon, says stronger employment growth is consistent with an improvement in the non-mining economy, which in GDP terms, and overall demand, is being masked by the weakness in mining.
Here’s a couple of charts from NAB to buttress this point. The first tracks the NAB business conditions index for non-mining industries against final domestic demand, released by the ABS in its quarterly GDP report.
And here’s the capacity utilisation rate from the NAB business survey against the RBA cash rate.
NAB note: “It reminds that trends in capacity utilisation historically have been closely correlated to trends in the RBA cash rate – and that the current trend in capacity use would ordinarily be more supportive of the market beginning to price a slow tilt to higher cash rates!”
Should unemployment continue to decline, regardless of Australia’s trend growth rate, NAB says it will likely have implications for Australian interest rates.
“If the unemployment rate continues to decline, the RBA will likely conclude that growth is above trend (or as we suggest – growth in that part of the economy that matters most for the labour market – is above trend) – irrespective of what that trend rate of growth now is.
This contention, if it turns out to be correct, would reinforce the NAB view that no further monetary policy easing will occur in this cycle and that the market may begin to think about when the RBA might begin to remove monetary accommodation, especially as the turn in the non-mining economy appears to have begun some time ago”.