Relief for the RBA for now: Shane Oliver
GUEST OBSERVER
Australian employment jumped a surprising 42,000 in May, sharply above market expectations for a 10,000 gain, lifting the annual pace from 1.7 percent to 2.0 percent.
This is the third month in a row of very strong jobs growth.
The gain was led by a 52,100 rise in full-time jobs following a decline last month, so the quality of jobs growth has improved but it can be volatile month to month.
Reflecting the strength in jobs growth, the unemployment rate dropped to 5.5 percent when the market expected it to hold at 5.7 percent. This rate is the lowest in 4 years (since early 2013).
The third month in a row of very strong jobs growth may reflect sample rotation issues, which have been a regular cause of consternation with the labour market statistics.
And the jobs data does have a tendency to run hot and cold so we are now due for a weak patch.
But the May jobs data also brings the annual rate of jobs growth more into line with leading indicators of jobs growth (job ads, vacancies and hiring intentions from the NAB survey), which continue to point to solid jobs growth ahead albeit they have exaggerated actual jobs growth since 2014. See the next chart.
Whatever it is, strong jobs growth provides welcome news after a run of soft data for GDP growth, consumer confidence, retail sales and housing related indicators.
The only problem of course is that underemployment remains very high at 8.8 percent leaving labour underutilisation high at 14.4 percent, albeit down from a recent high of 14.8 percent in February and this will act as an ongoing constraint on both wages growth and consumer spending.
Implications
The RBA no doubt breathed a sigh of relief with today’s jobs data showing unemployment falling to its lowest since early 2013. This will support the RBA in leaving interest rates on hold for now. Nevertheless with numerous other indicators remaining on the soft side – including overall economic growth, consumer spending, non-mining investment, indicators for housing construction and wages growth – our view remains that there is far more risk of another rate cut than a rate hike in the next 12 months. But to see a cut we will likely need to see a faltering in the jobs data.
It’s interesting to note that while the $A pushed up through $US0.76 on the back of the strong jobs data, the share market initially weakened a bit more on the news presumably not liking the idea of a higher $A or less chance of another RBA rate cut.
SHANE OLIVER is head of investment strategy and economics and chief economist at AMP Capital and is responsible for AMP Capital's diversified investment funds.
