Australia's jobs market is strengthening but it's what happens next that matters most

Coogee beach. Picture: Getty Images

Australian job advertisements continued to increase in May, suggesting that labour market conditions continue to strengthen.

According to ANZ, total advertisements rose by 0.5% to 169,944 in seasonally adjusted terms, leaving the increase on a year earlier at 7.4%.

Source: ANZ

The gain followed a 1.5% surge in April, leaving the monthly average increase so far this year at 1.2%, well above the levels reported during the same period a year earlier.

“The monthly rise has averaged 1.2% since the start of the year, compared to 0.4% per month over the same period last year,” said ANZ.

That’s an outcome that fits with recent strength in employment growth reported by the ABS, particularly in full-time hiring.

“The strong rise in employment in April along with the drop in the unemployment rate to 5.7% was consistent with the strength in ANZ Job Advertisements since the start of the year,” said David Plank, head of Australian economics at ANZ. “Overall, labour market conditions have improved since the latter half of 2016, and we expect this to continue over the coming months.”

That optimistic outlook contrasts to recent headlines on the Australian economy, dominated by recession talk given growing expectations that the economy may have contracted in the first three months of the year.

While ANZ says that Australia’s unemployment rate is likely to edge downwards over the rest of the year as official data catches up and matches the forward looking indicators, Plank warns that there is still plenty of uncertainty surrounding the outlook, adding to risks for the broader Australian economy.

“Given the level of spare capacity in the labour market, it is possible that additional demand for labour may be met by increasing the hours of part-time workers, which could keep the unemployment rate from falling,” he says.

“Moreover, spare capacity is expected to continue to weigh on wage growth over the next year, consistent with comments from the RBA’s liaison program and our own ANZ Wage Gauge.

“This in turn, is likely to have implications for consumption growth given the high levels of household debt and expected moderation in house price growth.”

Household consumption is the largest part of the Australian economy, accounting for around 60% of total GDP.

Record-low wage growth, coupled with an increase in household indebtedness, has been cited as one factor that has led to recent weakness in Australian retail sales volumes which accounts for around a third of total household consumption.

And with signs that the heat in Australia’s east coast housing market is starting to cool, there are heightened concerns that the weakness in retail spending may spill over into spending on services, the largest component in household consumption.

Given these risks, Plank says labour market conditions in the months ahead will play a crucial role in determining the outlook for Australian interest rates.

“We think the outlook for the labour market will be critical for the path taken by monetary policy over the next six months,” he says. “If the labour market falters then the prospect of further RBA easing will increase significantly.”

This is particularly pertinent given labour market data is often seen as a lagging economic indicator, revealing where demand for workers stood several months ago.

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