Australian Markets Weekly: Is employment feeling the effect of a weaker economy?

This week, the labour market dominates in Australia.

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For the full picture, download the report – Australian Markets Weekly 13 May 2019

 

  • In Australia, the unemployment rate is the main focus given the RBA emphasised it is the critical input into its decision-making on policy. We expect the unemployment rate to stay at 5%, with a risk it ticks up to 5.1% (mkt: 5.1%). Other labour market indicators are expected to be weak; we forecast weaker employment growth of 5k (mkt: 15k) and annual wages growth remaining low at 2.3% (NAB: 0.5% q/q, mkt: 0.6% q/q).  The NAB survey is also due Tuesday. Overseas, China-US trade tensions dominate and will likely overshadow the economic data in both countries.

Analysis – Is employment feeling the effect of a weaker economy?

  • With the RBA downgrading its outlook, the Board has highlighted that “a further improvement in the labour market was likely to be needed for inflation to be consistent with the target”.
  • Given the importance of the labour market to the RBA, we have estimated a cyclical/structural split of employment. This shows that the housing downturn and weaker growth is having an effect on the labour market, with cyclical employment falling over the past year.
  • The impact on total employment has been offset by a boom in structural employment, but we think this is overstated given implausible strength in public administration hiring.  For this reason, we are downplaying the cyclical/structural split of employment, at least until we see whether employer data on industry employment provide more robust estimates.
  • We think that the Reserve Bank would hold a similar view, where it is likely to continue to focus on the unemployment rate rather than the industry mix of employment in judging the health of the labour market.

Analysis –  Does knowing about people joining and leaving the labour force survey help us forecast unemployment?

  • Economists, including NAB, have used detailed information on the characteristics of people joining and leaving the labour force survey to help forecast the monthly unemployment rate.
  • Unfortunately, analysing the track record of this approach finds it offers no help in forecasting the monthly labour force numbers. This is because people joining the survey often change their answers over time, perhaps to avoid further questions and shorten the time taken to respond to the survey.

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