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But the RBA will focus on inflation
Australia’s labour market is currently experiencing a Goldilocks style easing – not too hot, not too cold, but just right. Despite the economy barely registering a pulse in the year to the March quarter, employment continues to expand at a solid clip. This week, the ABS released monthly employment data for June, which showed the economy created an additional 50K jobs, the majority of which were in full time employment. While employment data can be volatile on a month-to-month basis, we have now seen three consecutive months of strength, and over the June quarter, employment grew by a solid 125K. So where have all the jobs been created?
Over the last year, around three quarters of the jobs that have been created are in a narrow range of largely government-related sectors, including healthcare and social assistance, education, public administration and safety, utilities and administrative services. Clearly the government’s policy intervention to lift the wages of aged care workers is having a significant impact on employment in the healthcare and social assistance industry, with one-third of all jobs created being in that industry alone. With its skew towards a female workforce, the improvement in the job prospects of the aged care industry is also increasing the participation of women in the labour force. The female labour force participation rate has continued to trend higher, rising by almost 2 percentage points since before COVID. Over the same timeframe, the male participation rate has risen by just 0.5 percentage points.
Some sectors are doing it tough though. Job losses have been seen in the finance and professional services sector, and retail and hospitality, as cash-constrained households cut back on discretionary spending. The mining sector has also shed jobs in response to declines in some commodity prices. High profile layoffs have been announced recently by BHP and by Fortescue this week.
In aggregate though, conditions in the labour market are easing. Despite employment growth of almost 400K over the last year, the supply of labour has expanded even faster, resulting in a rising number of people facing unemployment. There are now over 100K more people unemployed than at the trough (around 500K) in late 2022. Prior to the onset of COVID, around 700K people were unemployed. We have, thus far, held onto roughly half of the post-COVID reduction in unemployment. The unemployment rate rose to 4.1% in June, up from a low of 3.5% in late 2022, but still well below the 5% rate prior to COVID. Despite some volatility, the unemployment rate has been broadly stable this year.
Survey measures suggest there is likely to be a deterioration in employment growth moving forward. Employment conditions in the NAB survey turned negative in June, while SEEK report a 17% decline in job advertisements over the last year. They also note an increase in competition for jobs, reflected in an increase in the number of applications per advertisement.
Our view is that the Australian economy was likely at its weakest point in H1’2024 with some modest improvement likely to be seen following the implementation of the government’s stage 3 tax cuts from July. With employment typically being a lagging indicator, we expect further easing in the labour market, resulting in a rise in the unemployment rate to 4.5% by the end of the year. Importantly, this will likely be achieved with much slower employment gains than we have seen so far this year. We expect to see employment growth slow to around 15K per month alongside slower population growth as the government’s policies to tighten student visas reduce net overseas migration to more sustainable levels. The modest recovery in GDP growth, combined with slower employment, will finally see some much-needed improvement in labour productivity.
If this is indeed the case, with wage growth also slowing, there will be sustained downward pressure on nominal unit labour cost growth in the second half of the year, which is the secret sauce to cooling core inflationary pressures. Rising unemployment and sustainably cooler inflationary pressures is a recipe for RBA rate cuts.
But before we can contemplate rate cuts coming onto the RBA’s agenda, there is one more very significant hurdle to pass: the Q2 CPI, which is due for release on 31st July. The RBA’s decision at their August meeting will be determined by the outcome for the trimmed mean CPI for the June quarter. Anything less than 1% q/q will likely see the RBA keep rates on hold. Anything above 1% will have the RBA reaching for the rate hike trigger. Our forecast is for the trimmed mean CPI to print at 0.9% q/q, which will allow the RBA to sit on its hands and allow the passage of time to present them with rate cutting opportunities later this year or early next.