The Reserve Bank of Australia (RBA) is likely to cut interest rates further this year, according to Credit Suisse.
In a research note on the Australian economy, analyst Damien Boey cited weakness in underlying employment figures as a catalyst for further cuts in 2017.
Australia’s employment results last week were a disappointment, with unemployment in February rising to 5.9%.
Boey notes that “employment quality improved”, as full-time employment increased by 27,100 while part-time employment decreased by 33,500.
However, he said that due to the monthly rotation of data compiled by the Australian Bureau of Statistics (ABS), February marked the fourth straight month where the new data included is higher than the old month that it’s replacing. “At some point, the statistical distortions must start to work the other way,” he said.
This chart below shows the discrepancy as new data is rotated into the sample:
Within the headline figures, Boey highlighted that aggregate hours worked fell by 1.2% in February, which reduced yearly growth in hours worked to -0.5%.
“The only states where hours worked are increasing in trend terms are Vic, Tas, NT and ACT. In other states, hours worked have fallen. We are particularly concerned about the state of affairs in NSW, because weakness in labour market conditions is occurring at a time when household leverage is at all-time highs.”
Looking ahead, Boey said that leading indicators point to “moderate weakness” in the labour market. Credit Suisse looks at business and consumer confidence levels and new loan approvals to gauge future movements in hours worked, which tend to lag the indicators by several months.
The chart below shows a modest uptick in job creation in 2017, although Boey said that the projected growth won’t be sufficient to keep up with a growing labour force:
Boey notes that last week’s employment figures actually reduce the likelihood of future rate cuts within Credit Suisse’s analytical framework. The poor result in hours worked means that some downside risk has now been realized, which increases the probability of future growth.
Furthermore, “the composition shift in favour of full-time employment makes our measure of the output gap (based on full-time equivalent employed as a share of the active labour force, and NAB survey capacity utilization) less narrow”. See the chart here:
In conclusion, Boey maintained the view that more rate cuts are on the way. He said that with more discussions around macro-prudential measures to control house prices, the RBA was free to use benchmark interest rates to boost activity in the real economy. Therefore GDP, CPI and labour force results will take more precedence in how and when the RBA adjust rates.
“We remain firmly of the view that multiple rate cuts are likely this year. This is because we believe that full-time equivalent employment is much weaker than is being officially reported. Also, we think that the outlook beyond the next few months is quite cloudy and weak demand could eventually cause employment outcomes to take a turn for the worst as well.”