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Australia: Solid momentum in labour market but slack remains – Westpac

Simon Murray, Research Analyst at Westpac, points out that Australian employment grew by 17.5k in February, broadly in line with the market expectation of 20k and a little below Westpac’s forecast of +25k.

Key Quotes

“Full time employment rose 65k and part-time fell 47k which reverses January’s compositional mix of -53k and +66k respectively. That saw hours worked rise 1.2% in February after falling 1.3% in January.”

“On the back of a very strong year for employment in 2017 of 3.4% annual growth, momentum has steadied over the past three months, with the three month annualised pace slowing to 2.1% – off recent highs. A 2.1% pace is consistent with a solid employment growth outlook over the near-term – as suggested by business surveys – and corresponds with our expectation for annual employment growth in 2018.”

“Part of the reason for slower employment growth going forward is normalising in full-time employment growth. After a flat 2016, full-time employment increased by 3.8% in 2017, making up for the soft patch. Employment decisions were likely delayed in 2016 due to uncertainty associated with the July Federal election, and then carried out thereafter. It appears that this period of ‘catch-up’ has largely played out, with the absolute number of full-time employees just short of where it would have been had we instead had two years of solid employment growth rather than the patchy ‘off-on’ period of 2016-17. Compounding the 2016 and 2017 full-time employment growth numbers results in a 1.7% annual rate.”

“February’s data release also includes the quarterly seasonally adjusted underemployment figures. Underemployment rose to 8.4% from 8.3% in November, remaining at a stubbornly elevated level but is down from 8.9% a year earlier. Looking back to when unemployment was last around current levels in early to mid-2013, the underemployment rate was 7.5%.”

“Ultimately that leads to the critical question surrounding the labour market as to what level of the national unemployment rate will we start to see wage pressures emerge. The RBA’s assessment of full employment is 5% but they have cautioned on the uncertainty of estimate. The experience in other economies such as the US, UK and Japan have showed unemployment push below previous estimates of full employment with only a subtle response in wages. While wages growth in Australia has marginally risen from its base to a still slow 2.1%, it is clear that there is still significant slack in the labour market evident by the unemployment rate still above NAIRU and a high underemployment rate. While that persists, we are unlikely to see a significant acceleration in wages growth.”