Australia Focus: Jobs, Recovery & RBA

Yesterday the labour market data came in weaker than consensus expectations, although hampered by seasonal factors with the Easter Holidays falling inside the reference period and the ABS citing the number of people taking leave over Easter as being unusually high. On the plus side the ABS detailing that the JobKeeper wage subsidy expiration had little to do with the weakness in hiring.

Full-time jobs rose 33,800 but part-time jobs fell 64,400 with overall employment falling -30,600. The first time in 7 months that jobs have declined. The headline unemployment rate fell to 5.5% but this was due to the participation rate declining to 66%. Hours worked dropped by 0.7% in April reflecting the increase in leave taken over Easter.

Of note, the underemployment rate fell to 7.8% which is the lowest level in 7 years. Underemployment (those employed but wanting to and available to work more hours), another contributor to labour market slack, typically accounts for most of the weakness in wage growth, rather than unemployment itself. Numerous recent research concludes that it is underemployment that has been significantly slowing down wage growth as in recent decades, underemployment has had a stronger relationship with wage growth than unemployment.

All in all, a mixed bag on the labour market.

The arguable curtailing of recovery momentum aligning with the drop in consumer confidence in May. Although, it must be noted that confidence is coming off of extremely elevated levels, and it could be argued that the increased number of people taking leave over Easter and declining underemployment is far from representative of weakness in the economy.

All told, the data highlighting that although the recovery seen to date in both the labour market and the economy has been full steam ahead and debatably world leading, there is still a lot of noise and the trajectory will not be linear.

The spotlight remains on the RBA’s ongoing challenge to meet mandated price targets, achieving their goal of a tighter labour market, wages growth and hence inflation. And alongside this their ability to wind back accommodative policy settings. With the borders remaining closed for the foreseeable future and the slow vaccine rollout/uptake there are plenty of hurdles still to overcome pertaining to continued non-linearity in the recovery. And on the other side, the expansionary budget delivered a fresh round of spending, adding to already buoyant business confidence and the potential for handover to the private sector in delivering a self-sustaining recovery.

Governor Lowe has stressed the RBA’s more reactive policy stance/inflation-targeting regime now requires actual, not forecast, inflation to be within the 2-3% target band before raising rates. This likely requires wages growth in the order of 3%, and a headline unemployment rate tracking 4% and below. The last time unemployment was close to 4% was back in August 2008.

Despite those end goals being a long way off the economy continues to track a stronger economic trajectory than forecast. Unless wage growth slows markedly in the June quarter the yearly growth should outpace the RBA’s updated forecasts, providing a read above 0.22%. And with wages currently tracking ~1.84% growth on a biannual basis it would be an unlikely outcome. According to anecdotal evidence wages are already on the rise. In combination with a continued decline in underemployment and emergent skills shortages there is evidence that wages are finally turning a corner. With the borders shut and set to remain so for the foreseeable future, skills shortages that are already an issue will remain, and this is just the cocktail to spark wages growth.

Will this be enough for the RBA set to make a decision on yield control and future bond purchases at its July 6 board meeting?

At present, the economy is far from full employment or full capacity, significant labour market slack remains, promoting weakness in wages and demand and limiting any underlying inflationary pressures. This was an ongoing problem pre-pandemic and as the economy continues the track forward and participation picks up, that spare capacity will remain for some time. In the March quarter of this year, wages have grown 0.6% from the prior quarter and 1.5% over the last year. Well below the 3% touted by Lowe. Although there are certainly emergent trends that remain positive, the reality is full employment is a long way off.

With inflation well below the RBA’s target band and the central bank having missed their target for a number of years, the RBA remains in a difficult position and rates are certainly set to remain at a historic low for quite some time - the onus is on the central bank to keep their foot on the gas. The same logic applies for maintaining the size and scale of their QE programme, with QE3, another $100bn likely to come in July. Another driver against tapering - avoiding unwanted upward pressure on the exchange rate, and stunting policy transmission via the exchange rate channel, whilst the RBA remain far from objectives - full employment, sustained wage growth and inflation back in the 2-3% target band remains a way off.

Although we see no taper and another $100bn in QE, when it comes to the RBA's YCC target, it is less likely this is extended to the Nov 2024 maturity. Were the RBA to extend, this would signal that the bank does not expect inflation will be sustainably back between their 2-3% target until late 2024, and rates would not be lifted until late '24. This would be at odds with recent commentary and any upside scenario that could entail.