The Reserve Bank of Australia has pinned the future path of its monetary policy to strength in the labour market, which has so far remained a bright spot in the domestic economy. The RBA is banking on employment strengthening and subsequent wage growth pressures offsetting the negative wealth effect and consequent hit to consumption due to the slump in property prices.
Australian households are under pressure to maintain spending habits as the property market continues to deteriorate given that most are significantly overleveraged and have whittled down their savings down to around decade lows. In our view, the central bank is too optimistic and will need to cut the cash rate, but until there is evidence of labour market strength tapering off, the RBA will be less inclined to cut rates.
Whilst the economy is vulnerable, and growth continues to lose momentum given that the labour market strength holds the key to the RBA's next policy move and likely Australia’s economic trajectory, we are watching the labour market leading indicators closely.
This week, ANZ job advertisements, which are typically a leading indicator of labour market conditions (unlike unemployment, which is lagging), recorded their steepest year on year loss in five years. Total job advertisements for the month of March sunk 1.7%, the 5th consecutive month of declines. This continued decline indicates a slowdown in hiring ahead and potential uptick in unemployment.