Oz central bank finally faces facts

It is no secret that the RBA has pinned its hopes to strength in the labour market, which has remained a bright spot. The RBA is banking that this strength will offset the negative wealth effect from falling property prices. This wager is still in place, "Over the next year, we are expecting a pickup in household disposable income to provide a counterweight to the wealth effects of lower housing prices.". 

The official unemployment rate fell to 5% in December and is now sitting at cycle lows, but it must be remembered unemployment is a lagging indicator, so the data only gives us a rear mirror view on the health of the labour market. ANZ job advertisements fell in January, a leading indicator that points to a potential drop off in hiring ahead, consistent with our view that economic growth is deteriorating and will continue to do so throughout the year.

Along with other leading indicators, recent data on the slump in building approvals highlights a marked decrease in residential construction to come, pointing to potential weakness in employment in residential construction. As the housing market slide continues it is only a matter of time before jobs are affected, particularly in Sydney and Melbourne where the steepest declines have been felt. We expect the unemployment rate to creep higher as economic activity slows.

The strength in the labour market is going to be crucial in determining the RBA’s next policy move. If, as many of the leading indicators suggest, the labour market strength proves to be transient and the unemployment rate does pick up we can expect a further easing bias to be adopted by the RBA. As previously noted, in our view, this eventuality will be inevitable, and the RBA will move to cut the cash rate, but for as long as employment remains at a cycle low the RBA will not fully capitulate on policy guidance.