- Economists believe Australia’s labour market remains in a solid position, even though jobs unexpectedly fell in July.
- While the unemployment rate edged lower, the consensus remains that faster wage growth is still a long way down the track.
- Economists also provided context around sample rotation, state-by-state results and the outlook for interest rates.
Australia’s July jobs report missed expectations today, but most economists agree that the underlying health of the domestic labour market remains relatively strong.
Jobs growth fell by 3,900 in July in seasonally adjusted terms, missing forecasts of a 15,000 gain.
But due to a decline in the labour force participation rate — defined as the number of people who are either employed or actively looking for work — the unemployment rate edged lower to 5.3%.
In trend terms, Australia’s unemployment rate is now at the lowest level since 2012. However, yesterday’s wage data indicates the labour market needs to tighten significantly further before there’s a material lift in wage growth.
As with the release of every employment report, there’s a lot of different ways to analyse the results and assess what it all means for the broader economy.
In view of that, let’s see what the experts have to say:
Justin Smirk, Westpac
As we expected, sample rotation drove both a decline in employment and participation. Nevertheless, the dynamic response of labour supply to changes in demand, particularly for females, is helping to lower the unemployment rate.
By state, NSW was the source of weakness in employment (-27,100) with all of the weakness in part-time employment (-39,700) and a solid gain in full-time employment (+12,600). The weakness in NSW employment is something we are watching closely as the economic cycle in that large state matures.
Despite the small fall in employment in July, we would argue that the Australian labour market remains in a fair position. The pace of growth has stabilised around 2.5% y/y, but the six month annualised pace of 1.3% is down from 2.0% in June and is currently less than the estimate of working age population growth of 1.6%. We do expect the six month annualised pace to recover over the next few months to above the pace of working age population, which is why we are watching the recent trends in the NSW labour market so closely.
Looking ahead, we expect employment growth to slightly lag the growth in the labour force at around 1.5% y/y at year-end 2018, hence we see the unemployment rate drifting up to 5.5%. When you overlay the larger than usual level of underemployment we would argue there is a persistent degree of slack in the labour market.
Ben Jarman, JP Morgan
We always put the most stock in the unemployment rate, so while the change on the month was very minor, the important point is that the labour market has incrementally tightened over the past few months. This is also the most important information for the RBA, and will keep it comfortable in the narrative of gradual improvement in activity and capacity utilization.
The most significant question for the rates outlook is whether the unemployment rate can keep marching down as housing and consumption slow. In our view it can’t, given the feedback loop from domestic demand through to the labour market.
Even with slight declines in the unemployment rate, a slower rate of employment growth this year, relative to last year’s boom, will likely see labour income growth drop a gear through 2018. Were unemployment to hold steady at current levels, or even fall a little further, while employment growth slows, it would pose unique questions for the RBA.
The central bank has traditionally been driven almost singularly by the unemployment rate, due to its inflation mandate. But the RBA has sounded more like it is income-targeting of late, as financial stability concerns require disposable incomes growth to hold firm. This has motivated officials’ recent preference for a gradual return to the inflation target because over the longer run, that would forestall rate hikes, and improve sustainable income growth through a lower NAIRU.
UBS economics team
July jobs unexpectedly fell, albeit after a booming 58,000 increase in June. Yearly growth moderated to 2.4%, the slowest since Jul-17, after surging 3.5% last year (the fastest since 2005). Lead indicators suggest a peak in momentum, but still imply ongoing solid annual growth of around, rather than material weakening.
But average weekly earnings (AWE) growth was still soft at 2.4% y/y, indicating little wage pressure. AWE bounced 2.7% annualised in the 6-months to May 2018, but held at a still-soft 2.4% y/y. This coupled with Q2 WPI remaining low at 2.1% y/y, suggests GDP-basis average earnings (& household income) will remain soft.
Importantly, unemployment remains above NAIRU – in contrast to most other major economies – partly reflecting a positive labour supply shock (higher participation) from booming population. Given the RBA thinks that wages need to lift to by around 3.5% to sustain inflation at their 2.5% target, recent data still suggests there is too much slack to generate this outcome in the near-term. Hence, we still see rates on hold until 2020.
Paul Dales, Capital Economics
The surprise decline in employment July isn’t a big concern as other evidence suggests the economy has not stalled. But even if the labour market were to shift back into top gear in the coming months, the road to much higher wage growth is a very long one.
The 3,900 fall in employment was the first drop since February, but the fall followed a big 58,200 gain in June. The three-month average change is still 22,400 and the fall in the annual growth rate from 2.8% to 2.4% still leaves it at a decent level.
So nothing has really changed – jobs growth remains healthy enough and the unemployment rate is still edging lower. We agree with the RBA that it might not be long before the unemployment rate falls to 5%. But we don’t think that will generate much wage growth as we suspect the natural rate of unemployment is around 4% rather than the RBA’s estimate of 5%.
Felicity Emmett, ANZ
In a reversal of last month’s trends, NSW was the weakest with employment down sharply, while Victoria was the strongest. Elsewhere, there were small falls in WA and Qld, while the other states and territories saw modest rises.
Victoria also outperformed on the unemployment rate with a drop to 5.0% – its lowest rate since January 2012. The improvement has brought the Victorian unemployment rate much closer to NSW, after an uncharacteristically long period of underperformance.
Leading indicators for the labour market have been mixed of late, but on balance continue to point to solid jobs growth. ANZ Job Ads bounced in July, but are now trending lower, while business indicators, although still elevated compared with history, are off their highs. Overall though they continue to point to ongoing gradual improvement in the labour market in the near term, with a further decline in the unemployment rate.
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