- The RBA continues to cherry-pick economic data to justify its view that Australian unemployment will continue to drift lower in the period ahead.
- It continues to place significant weight on vacancy data released only once a quarter. The last time it was released was November last year.
- A large number of leading labour market indicators have weakened noticeably in recent months, pointing to a slowdown in hiring, and potential lift in unemployment, later this year.
- The RBA has nominated a sustained lift in unemployment as one outcome that could see it cut rates again.
- Given that so many are expecting rate cuts this year, it’s clear that many are sceptical towards the RBA’s views that unemployment will fall further.
The Reserve Bank of Australia (RBA) has used a speech to the Australian housing conference to talk about the labour market, underlining just how important this area is for policy deliberations at present given the abrupt slowdown in the economy.
It’s clear from the tone of the speech, delivered by Assistant Governor Luci Ellis, that the bank remains optimistic that labour market conditions won’t falter in the months ahead, putting it at odds with other prominent economists, and those in financial markets, who don’t share such optimistic views about what lies ahead.
“One can be reasonably confident in the steer the labour market data are giving us, because it is coming from multiple, independently collected data sets,” Ellis told the Australian Housing Industry Association (HIA) breakfast in Sydney.
“The employment and unemployment data come from the ABS’s survey of households. But a survey of businesses, also from the ABS, tells us that the number of job vacancies has been a very high share of the total jobs available.
“Separate private-sector surveys of businesses tell us that many firms plan to hire more workers. Many of our own liaison contacts also tell us that they are hiring.”
So it all sounds hunky dory, right? Jobs growth to the moon! However, there’s a just a small problem.
The vacancy series that Ellis refers to, and the one that the RBA is clearly placing significant weight on to justify its forecasts for lower unemployment in the period ahead, is about the only leading labour market indicator that is still pointing to firm employment growth ahead.
Unfortunately, this series is only released four times a year, meaning a large chunk of the RBA’s optimism is derived from one data set that was released nearly three months ago.
Job ads series from SEEK and the government have rolled over in recent months, with the number of positions vacant on these measures both lower than a year ago. Other leading labour market indicators, such as business profitability, home prices and capacity utilisation among firms, has also weakened noticeably in recent months.
Combined, a large raft of alternate economic indicators is currently flashing red on hiring in the months ahead.
That’s not all that surprising given the extend of the slowdown in the Australian economy in the second half of last year, growing at an annualised rate of around 1%, some four-times slower than the pace seen in the first six months of the year.
With few signs in recent economic data suggesting there’s been much of an improvement in the economy this year, if any improvement at all, it explains why so many in financial markets disagree with the RBA’s view that risks for the next move in Australia’s cash rate are “evenly balanced”.
Many now suspect there’ll be at least one 25 basis point rate cut this year, with the risk of a second. Some believe there may be even deeper cuts to come, leaving the cash rate at just 0.75% by mid next year.
Earlier this month, board members at the RBA said there “continued to be tension between the ongoing improvement in labour market data and the apparent slowing in the momentum of output growth in the second half of 2018”.
The board also acknowledged that it was appropriate to hold Australia’s cash rate steady while “new information became available that could help resolve the current tensions”.
That means updated job vacancy data from the ABS this week will be important given the RBA has placed so much emphasis on this release, largely ignoring the weakening in most other leading labour market indicators.
With trend employment growth already slowing, any sign that openings at employers are also starting to fall will only bolster the opinion of many outside the bank that previous strength in hiring is unlikely to be repeated.
While the RBA is waiting for a resolution of current tensions between the firm job market conditions and weak economic growth, it’s clear that many believe the only tension that needs resolution is an acknowledgement from the RBA that things are not looking all that optimistic.
The next vacancy report from the ABS will be released on Thursday, March 29.
It could go a long way to determining who is currently right on the outlook for unemployment — the RBA or markets.
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