RBA on track to cut to 0.5% by year end: Shane Oliver
EXPERT OBSERVATION
Employment increased by a stronger than expected 41,100 jobs in July recovering from a loss of -2,300 jobs (revised) in June.
Annual employment growth slightly increased to 2.6%, from 2.4% the month prior.
Full time employment rose by 34,500 building on a gain of 21,100 in June. Part-time employment rose by 6,700 after being preceded by a loss of 23,300 jobs last month.
The unemployment rate remained steady at 5.2% retaining an uptrend from a low of 4.9% in February. The participation rate increased marginally to 66.1%.
Hours worked were up 0.5% after being flat last month and annual growth has recovered to 2.0%.
Underemployment in the labour market rose slightly to 8.4% compared to 8.2% in June, and remains very high.
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Source: ABS, AMP Capital
Jobs growth improved strongly in July, albeit after last month’s glacial pace of additions was revised to a net loss of jobs.
However, a rise in the participation rate prevented the unemployment rate from falling.
Meanwhile, despite a modest improvement in the last few months our Jobs Leading Indicator continues to point to slower jobs growth ahead on the back of a slowing trend in jobs ads, job vacancies and hiring plans, so we still see a further slowdown in jobs growth over the next six months as the housing construction downturn flows through the economy.
This is likely to see trend jobs growth continue to fall well below the roughly 19,000 new jobs needed each month to absorb new entrants to the labour force.
As a result we continue to see unemployment drifting up to 5.5% by the end of the year.
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Source: Bloomberg, AMP Capital
Labour market underutilisation ticked up to 13.6% in July from 13.4% in June as underemployment rose indicating that “spare capacity” in the labour market remains very high.
The comparable measure in the US is just 7% and it fell last month! With jobs growth expected to slow in Australia, labour market underutilisation is likely to remain high and this in turn will prevent much if any pick up in still weak wages growth.
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Source: Bloomberg, AMP Capital
Implications
The rise in unemployment from 4.9% earlier this year and continuing high underemployment indicates that significant “spare capacity” remains in the labour market and in the economy.
The rebound in employment growth seen in July may provide the RBA with some encouragement and breathing space.
However, while the RBA’s back-to-back rate cuts, tax refunds for low and middle income earners and strong infrastructure investment should help limit the rise in unemployment to around 5.5%, they are unlikely to be enough get unemployment down to the 4.5% or less needed to see stronger wages growth and higher inflation.
And in the meantime the risks of even slower global growth on the back of the escalating US/China trade war are rising as indicated by falling share markets and bond yields racing to zero and below.
As a result we remain of the view that the RBA will have to cut rates further and see the next 0.25% cut coming next month followed by another cut in November ultimately taking the cash rate down to 0.5%.
Dr Shane Oliver
Head of Investment Strategy and Chief Economist AMP Capital