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- Australian employment increased for a 17th consecutive month in February, driven by a 64,900 surge in full-time employment.
- However, unemployment and underutilisation both increased, creating doubt about whether wage growth will continue to improve in the quarters ahead.
- Many economists suggest strong population growth and Australians returning to the workforce is making it difficult to reduce unemployment by any significant amount.
Australia’s February jobs report had something for everyone.
For the optimists, employment increased for a 17th consecutive month, extending the record set in January, with full-time employment surging by 64,900.
Over the year, employment jumped by 420,700, the second-highest level over a 12-month period on record. Most of it was full-time employment.
Total hours worked also rose by 21.2 million hours, reversing much of the weakness seen in the prior two months, while the labour force participation rate, measuring the proportion of Australia’s working age population either in or actively seeking work, ticked up to 65.7%, the equal-highest level seen in seven years.
However, despite the boom in employment and hours worked, the unemployment rate rose from 5.5% to 5.6%, moving further away from the 5% level many believe unemployment needs to fall below before wage pressures begin to accelerate.
Broader measures of excess capacity in the labour market such as underemployment and underutilisation also edged higher, casting further doubt as to whether wage growth will pick up gradually in the years ahead as the Reserve Bank of Australia (RBA) currently suggests.
As we said at the top, there was something for optimists and pessimists alike in the February report.
Markets certainly took their cue from the lift in unemployment, underemployment and underutilisation, partially reversing earlier gains in both the Australian dollar and government bond yields given the implications for wage and inflationary pressures.
Now it’s time to see what Australia’s economic community have made of the report?
Was it good or bad, or something in between?
We start with Su-Lin Ong of RBC Capital Markets.
Su-Lin Ong, RBC Capital Markets
We would make a few observations from today’s labour force survey.
Firstly, while the details of the survey were mostly positive, they were also a little mediocre particularly after the stellar performance of the labour market for much of 2017. Employment generation has clearly eased from a 50,000 monthly pace around mid 2017 to a little above 20,000 over the last three months. We have some theories on the moderation in jobs growth including the likelihood that the outsized gains in employment generation in health and social service jobs — likely related to NDIS — in 2017 may not be sustained.
Secondly, employment generation of a 20-25,000 pace is not enough to place much downward pressure on the unemployment rate nor underemployment. Accordingly, we think the most significant statistic today was the small lift in the underemployment rate to 8.4% from 8.3% following a steady decline over the last 12 months from an historic high of 8.9% at the start of 2017. Unlike much of the G7, underemployment in AU is still elevated and well above pre-GFC levels. We note that this is just one data point and that the leading indicators of employment are encouraging with the business surveys confirming buoyant conditions and confidence. This may well see a lift in the pace of employment generation ahead which will be necessary to continue to erode the excess capacity in the labour market and broader economy. We hope so.
Thirdly, at this juncture, this degree of slack suggests limited significant or sustained upward pressure on wages although we are reasonably confident that wages growth has troughed. However, upward momentum will be difficult.
Today’s data and details suggest that the RBA’s recent downward revision to its unemployment rate forecasts may be a little optimistic. We see no reason to change our base case for a steady RBA throughout 2018.
John Peters, Commonwealth Bank
Today’s numbers confirm that the strengthening labour market conditions evident over 2017 continued their robustness into the early months of 2018. The unemployment rate’s journey lower has been impaired by a 1% lift in the participation rate over the past year as previously disillusioned workers rejoin the jobs hunt. The unemployment rate was 5.6% in February, only 0.2 percentage points lower than a year ago.
The latest wage price index increased by 0.6% in the December quarter and growth over the year had increased slightly to 2.1%. Across the states, wages growth had risen to almost 2.5% in Victoria, and in Queensland and Western Australia had increased from the lows recorded during 2016/17. In contrast, wages growth in New South Wales (NSW) had been steady at around 2% for a couple of years, despite the very much stronger labour market conditions in that state.
So NSW in a way is the “canary in the mine” on this wages issue given it has been, the strongest labour market in Australia over the past year by a country mile but wages haven’t budged yet with growth stuck at an insipid 2%. This is despite the fact that the NSW unemployment rate has been below 5% in a 4.6% to 4.9% range for ten of the last eleven months. Watch the NSW wage space for a smoke signal about any strengthening in wages ahead.
Our long-held view is that the RBA won’t move until November 2018 at the very earliest to edge rates higher.
George Tharenou, UBS
The labour market is strangely mixed. Jobs — especially full-time — are around as strong as possibly could be expected at this stage of the cycle. This is supporting housing activity. However, booming population, especially migration, and a spike in participation is a massive ‘positive labour supply shock’, seeing unemployment rate steady for 2 years now.
There is still likely more spare capacity in Australia’s labour market compared with other major economies which are at or below NAIRU – and hence we still don’t see a large lift in wages in the near-term.
Overall, we still see the RBA on hold in 2018.
Diana Mousina, AMP Capital
In an environment of slower employment growth and small rises in wages, the Reserve Bank of Australia will tread carefully and is unlikely to be in a rush to lift interest rates. This patience from the Reserve Bank has been clear in recent communication. There are pockets of strength in Australia — business confidence is very strong, non-mining investment growth is rising and infrastructure spending is high. But, the low inflation environment, risks around the housing market and a high currency will limit growth in the economy this year and keep the Reserve Bank cautious.
A rate rise is still some time away — we expect a rate rise from the Reserve Bank in the first quarter of 2019.
Ivan Colhoun, National Australia Bank
The increases in participation and population mean that the spare capacity in the labour market is not being reduced as the RBA had hoped. Indeed, in the past few months, employment growth has eased a little, which is contributing to a slight rise, rather than continuing fall, in unemployment. This quarter, the underutilisation rate is estimated to have risen slightly to 13.9%, which is surprising given other indications suggesting increased reports of skill shortages.
The RBA has made clear how important it is to see a drop in unemployment towards 5% and some pick-up in wages growth. This is needed for the Bank to feel more confident that inflation will return to target. So far that drop in unemployment isn’t happening especially quickly, which will keep the market thinking that there won’t be any action from the RBA any time soon.
That said, it’s worth noting that the current behaviour of the unemployment rate should not be necessarily be interpreted as in the past. Labour demand has been increasing. And jobs have been created, something the leading indicators suggest should continue. It’s just that we aren’t creating sufficient jobs for the increasing population and those re-entering the workforce. The latter likely means that a broad-based increase in wages will be slower in emerging.
There’s nothing in these data to suggest an early rate rise by the RBA.
Felicity Emmett, ANZ Bank
Employment rose again in February, extending the record string of jobs gains. The rise in both the unemployment and underemployment rates was, however, quite disappointing. The strength in the jobs market is clearly drawing in more workers, but ongoing labour market spare capacity suggests wage pressures are likely to remain quite muted.
Leading indicators continue to suggest that the labour market will tighten further. Record high business conditions and ongoing growth in job ads suggest that solid jobs growth should continue and the unemployment rate should decline further in coming months.
Paul Dales, Capital Economics
None of [the report] is a big deal.
To two decimal places, the unemployment rate nudged up from 5.50% to 5.56% and the underemployment rate rose from 8.34% to 8.37%. But it is striking that, despite the strength of jobs growth and the reasonable health of the economy, the slack is not declining.
Our view that the unemployment rate will need to fall below 4.0% to trigger much faster wage growth suggests the financial markets are still jumping the gun by expecting the RBA to raise interest rates in the first half of next year.
Callam Pickering, Indeed
The good news for the Australian economy is that a lot of jobs are being created, across a wide range of industries, and many Australians are re-entering the workforce after a period in the wilderness.
Nevertheless, there is still much progress to be made. Higher participation can lead to greater labour market slack, which helps to explain the ongoing weakness in wage growth. We believe that there is reason to be optimistic on wages, particularly now that businesses are cashed up and reporting a greater difficulty in finding new staff, but improvement could be slow.
The Reserve Bank will naturally be pleased with today’s outcome. They would obviously prefer wages to be growing at a faster pace but higher participation in the labour force is certainly a welcome development. With wage growth and inflation so low, along with plenty of labour market slack, we don’t think tighter monetary policy will come into the RBA’s near-term calculations. We still believe that a rate hike won’t occur until 2019.
