This economist explains why slower Australian jobs growth could keep the RBA sidelined even longer

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  • Australian employment increased by over 420,000 in the past year.
  • Capital Economics says jobs growth will likely slow in the year ahead, keeping unemployment levels elevated.
  • The group says this will weigh on wage and inflationary pressures, ensuring the RBA won’t lift rates until the second half of 2019 at the earliest.

Australia has been on a hiring frenzy over the past year, led by a booming growth in full-time workers.

According to the Australian Bureau of Statistics (ABS), total employment increased by 420,700 in the 12 months to February, the second-largest total over a comparable period on record.

Within that figure, full-time employment jumped by 327,600, outpacing a smaller increase of 93,100 in part-time workers.

At 3.5%, the annual pace of employment growth has rarely been stronger in the 40-odd years the ABS survey has been conducted, currently sitting near double the 1.9% long-run average.

The fact that employment has now increased in each of the past 17 months — the longest consecutive stretch of gains on record — only acts to underline just how strong labour market conditions have been.

However, while some business surveys suggest employment growth may accelerate even faster in the months ahead, not everyone shares that view.

Kate Hickie, Australia and New Zealand economist at Capital Economics, is one who thinks employment growth of this magnitude will be hard to sustain in the near term.

“We expect that employment growth will remain above average through most of this year before easing to around 1.5% by the end of 2018 as the large gains in 2017 fall out of the annual calculation,” she said in a note.

“In other words, while we aren’t expecting the stellar performance of 2017 to be repeated in 2018, we aren’t expecting a sudden sharp deterioration either.”

While annual employment growth of around 1.5% is nothing to scoff at, equating to average growth of just over 15,500 per month, Hickie says that could prevent even slower progress in lowering Australia’s unemployment rate depending on what happens with labour force participation in the period ahead.

Source: Capital Economics

“The strength of the labour market over the past year appears to have attracted people back into the labour force, with the participation rate approaching record high levels as women and older men enter the workforce,” she says.

“If this trend continues… the unemployment rate will only edge down from 5.6% currently to around 5.2% by the end of 2019.”

While such an outcome would fit with current unemployment forecasts offered by the Reserve Bank of Australia (RBA), Hickie says that given still-elevated levels of underutilised workers in Australia, along with the experience seen in other advanced economies in recent years, will likely keep Australian wage growth incredibly subdued.

“We are less optimistic than the RBA on the outlook for wage growth,” she says.

“First, despite the recent strengthening in the labour market there is still plenty of spare capacity.

“The underutilisation rate, which is a broader measure of spare capacity than the unemployment rate as it also takes account of employees who would like to work more hours, is still high.

“Second, the longer-term structural forces such as globalisation and technological change, which have weakened the relationship between spare capacity and wage growth globally, are likely to persist in Australia.”

Source: Capital Economics

Hickie says that Australia’s natural rate of unemployment, also known as the non-accelerating inflation rate of unemployment, or NAIRU, is probably closer to 4% than 5%, meaning the prospects for a steep lift in wage growth in the coming years appears unlikely.

“We expect wage growth to rise only modestly in the coming few years from 2.1% currently to 2.5% by the end of 2019,” she says.

“This is a key reason why we expect underlying inflation to remain below the bottom of the RBA’s 2-3% inflation target over the next two years and why we doubt the RBA will begin to raise rates until the second half of 2019.”