Australian markets strategist, Saxo Bank
Summary: The August jobs report on top of Tuesday’s dovish minutes seals the deal for the RBA to cut the official cash rate again in October from the current record low of 1.00% to 0.75% as we have previously thought.
Employment growth was robust, and participation hit a new record high rising by 0.1ppt to 66.2%, but unemployment has continued to push upwards since last year and has ticked up from 5.2% to 5.3% in August. This is because the increasing labour force size continues to outpace actual hiring.
The RBA now estimates the “non-accelerating inflation rate of unemployment” (NAIRU), which refers to a theoretical level of unemployment below which inflation would be expected to pick up, is now around 4.5% and could be lower and with unemployment now sitting at 5.3% it is well above the 4.5% needed for the RBA to satisfy its objective of full employment. And well above the level needed to spur wage gains and inflationary pressures. The RBA have previously outlined that they will use monetary policy to achieve their objectives, and the case for continued rate cuts remains, so we see no reason for the RBA to hold back in October.
Wage growth MIA
But the biggest issue in August’s jobs report is the increase in labour market slack which has seen the underutilisation rate, people who are either unemployed or looking for more hours of work, rising again to 13.8%. This spare capacity is a significant impediment to spurring wage gains. Underutilisation will need to fall substantially from the current level of 13.8% before seeing a material uptick in wages, in turn weighing on the ability for the RBA to reach their mandated underlying inflation target of 2-3%. Spare capacity in the labour market will continue to prevent upward pressure on wages from materialising and depress consumption spending, particularly against the backdrop of heightened economic uncertainty on both the domestic and global front. The outlook for consumption, the largest component of GDP (60%), therefore remains under pressure. An over-leveraged consumer who has whittled away their savings and is now devoid of any material pick up in wage growth is unlikely to increase discretionary spending, particularly given recent consumer sentiment surveys point to rising concerns over the economic outlook. Another worry relating to the consumption outlook and potential for private demand to pick up is the limited impact of the tax cuts to date. As the RBA minutes indicated, and we feared, the propensity to spend rather than save the extra cash has been limited. Instead consumers are choosing to deleverage given wage growth is weak and household debt levels remain high. The current low growth environment that Australia has seen since the economy lost momentum last year will be sustained for a prolonged period of time whilst the outlook for consumption is pressured by persistent stagnation in incomes.
Other aspects of the data also add to the case for the RBA to continue to cut the cash rate, as the pace of full-time job creation is slowing, and average hours worked is declining despite rising participation. So, although jobs are still being created and people are entering the labour force, the hours of work are dropping off indicating the quality of job creation is slipping.
Also of concern is the fact that forward looking indicators such as job adverts and vacancies continue to indicate further weakness is yet to materialise in the labour market. The residential construction cycle also remains in a downdraft which continues to pressure the outlook for construction employment and could see unemployment track higher in the coming months.
Meanwhile the RBA are also having to contend with a deteriorating global growth environment particularly in Europe and Asia as the business cycle slows. Additionally, the mounting impact of trade uncertainties, for which monetary policy is ill-equipped to address, will weigh on the RBA’s outlook for rates. The non-linearities that accompany the trade war and its secondary effects are not something that central bank models cannot account for. And even if monetary policy is ill-suited to deal with the by-products of a trade war, whilst international cooperation remains on the decline and Frydenberg lavishes his coveted soon to be surplus, the RBA have little choice but to act.