November’s labour force survey delivered an unexpected drop in the unemployment rate from 5.3% in October to 5.2% in November, with employment rising by 39.9k against estimates of just 15.0k jobs. Underutilisation fell from 13.8% to 13.5% and underemployment also fell from 8.5% to 8.3% after both measures rose in the previous month. Although the decline in spare capacity is positive, it merely represents a correction of the previous months rise, and labour market slack remains a persistent impediment to wage growth.
The RBA has signalled a tighter labour market will be key to making progress on their objective of returning inflation to the 2-3% target band, but currently the level of labour market slack is well above the level at which wage growth is precipitated. Consumer sentiment surveys outline that the Australian consumer is mired by worries about the economy and with wages going nowhere overindebted consumers are choosing to spend less and save more in a bid to pay down debt. At present, concerns about the outlook for the economy, job security and stagnant wage growth are outweighing any positive wealth effect from property prices on the rise again. Without income growth this dynamic is likely to persist for a protracted period even as house prices recover, hence pointing to a weak outlook for retail and household consumption.
The participation rate, which refers to the total number of people who are currently employed or in search of a job (the labour force) as a percentage of the working age population stood still at 66.0%. Labour force participation has begun to drop off after peaking in August, helping to push unemployment lower in November. If participation continues to trend lower throughout 2020 this could help the RBA in moving toward a lower unemployment rate if the pace of hiring continues. The problem is that jobs growth continues to trend lower and is also poised to slow in 2020 which will prevent the unemployment rate from moving lower. Several quarters of below trend economic growth, along with weak consumer spending and poor business conditions presents a deteriorating outlook for the labour market and employment growth. Other forward look indicators of labour market health like ANZ job ads and vacancies also point to weakness in the labour market ahead and reduced demand for labour.
Unemployment still remains well above the RBA’s estimate of full employment of 4.5% needed to spur wage growth, which is likely lower if we look to international examples (e.g. US, UK, NZ). And with unemployment set to remain elevated and labour market conditions to deteriorate in 2020, further stimulus will need to be injected into the Australian economy for the RBA to progress toward their full employment and inflation objectives, particularly whilst the government remain reluctant to loosen the fiscal purse strings. Without a focus on productivity enhancing fiscal measures and a collective effort from policy makers to restore business conditions and revive economic activity, slower lower growth is set to endure. Instead we see governments pervasive short-termism deter from long term problem solving, and hence an over reliance on monetary policy.
The RBA has now ear marked 0.25% as the effective lower bound for interest rates in Australia. With the cash rate currently sitting at 0.75% that leaves two further rate cuts in the pipeline upon which QE would then be a consideration, although the hurdle would be higher. Consequently, we still expect the RBA will ease again in February and once more in 2020 taking the cash rate to 0.25%, the effective lower bound.