Jobs data seals the deal for more rate hikes

Yesterday’s very strong June labour force data has made a rate increase certain when the Reserve Bank meets on August 2. It is now just a debate about the size – half a per cent like in June and the RBNZ on Wednesday, or 0.75% like the US Fed last month.

The Australian labour market is tight and getting tighter, judging by unemployment falling to a new 48-year low of 3.5% last after 88,000 people found work in Australia’s tight labour market and unemployment fell sharply, according to the Australian Bureau of Statistics.

Unemployment in fact fell to the lowest level since 1974 (when quarterly surveys were the norm) and came despite a rise in the participation rate to record highs as more people joined the workforce looking for employment.

They were not frightened off by rising inflation, rising interest rates, rising Covid infections and falling consumer confidence levels.

The fall in unemployment is much faster than the Reserve Bank had been predicting – it doesn’t see unemployment falling to around 3.5% until June next year – and means that with another big rise in inflation due in the Consumer Price Index report on July 28, the prospects of the central bank lifting the cash rate by at least 0.5% looks odds on. It could even be as much as 0.75%.

And after the sharp surge in US inflation in June to a more than 40 year high of 9.1%, the chances of a 1% rise by the Federal Reserve in its federal funds rate is also looking increasingly likely, especially after the Bank of Canada lifted its key rate by 1% on Wednesday.

AMP chief economist Shane Oliver said in a note after the labour force data was released that he doubts the RBA will go much beyond a rise of 0.50% at its August 2 meeting.

“Given the ongoing concern about high and still rising inflation and the need to prevent inflation expectations moving higher we expect another 0.5% rate hike in August,” Dr Oliver forecast yesterday.

“The move by the Bank of Canada to hike by 1% and the possibility of the same by the Fed later this month suggest that the RBA may hike by 0.75%, particularly if the June quarter CPI is another shocker (ie well beyond our expectation for a rise to 6.2%yoy).

“However, we lean to the view that 0.75% plus hikes will be avoided in Australia given that the RBA meets monthly whereas the Fed and BoC only meet 6 weekly and so the RBA does not need to hike as much as they do at each meeting to achieve the same over a 3-month period and inflation and wages pressures are a bit less in Australia than they are in the US and Canada,” Dr Oliver added.

As the ABS has been reporting in previous updates and in job vacancies data, the fall in unemployment through the pandemic has coincided with large increases in job vacancies (480,000 in May 2022).

As a result, there was almost the same number of unemployed people in June 2022 (494,000 people, down 54,300 from May) as vacant jobs.

“This equates to around one unemployed person per vacant job (1.0), compared with three times as many people before the start of the pandemic (3.1)”, ABS’s head of labour statistics, Bjorn Jarvis said yesterday.

The ABS said the unemployment rate continued to fall for men and women (both down 0.4 percentage points).

“The 3.4 per cent unemployment rate for women was the lowest since February 1974 and the 3.6 per cent rate for men was the lowest since May 1976,” Mr Jarvis said.

“The large fall in the unemployment rate this month reflects more people than usual entering employment and also lower than usual numbers of employed people becoming unemployed,” the ABS said.

“Together these flows reflect an increasingly tight labour market, with high demand for engaging and retaining workers, as well as ongoing labour shortages.”

The increase in employment of 88,000 in June was the eighth consecutive monthly rise in employment, following the easing of restrictions after the Delta lockdowns late last year.

With strong employment growth for both men and women, the employment to population ratio increased to 64.4% in June, the highest in the series.

“The strong increase in female employment, which accounted for around two-thirds of the total increase (63.0 per cent), saw their employment-to-population-ratio rise to a new record high of 60.3 per cent. It is now 2.3 percentage points above its pre-pandemic level,” Mr Jarvis said.

There was also strong growth in youth employment (those aged between 15 and 24 years) which increased by 23,000 people (1.1 per cent), and accounted for over a quarter of the total increase in employment.

The participation rate increased by 0.1 percentage points to 66.8% in June, the highest in the series and 0.9 percentage points above March 2020.

While underemployment rose to 6.1%, the fall in unemployment left the labour underutilisation rate unchanged at 9.6% which is its lowest since 1982, and well below the levels that prevailed over the low wage growth period from 2014 to 2021.

Unlike the rise in employment, seasonally adjusted hours worked fell slightly in June (down less than 0.1 per cent), following rises in April and May.

“In line with large numbers of COVID-19 cases in June, the number of people working reduced hours due to illness continued to be high. This reflected ongoing disruption associated with the Omicron variant and cases of influenza,” Mr Jarvis said.

“There was around 780,000 people working fewer hours than usual due to own illness in June 2022, almost double the usual number we see at the start of winter.,” Mr Jarvis pointed out.