Australia | Mar 13 2008
By Chris Shaw
Following two successive rate hikes it is clear inflation is a major headache for the Reserve Bank of Australia (RBA), but according to TD Securities senior strategist Joshua Williamson, it isn’t the bank’s only headache given today’s stronger than expected employment data.
Market expectations of an increase in employment of around 15,000 proved very inadequate as 36,700 new jobs were created in February, driven by growth in full-time employment of 47,700 jobs offset by a fall of 11,000 in part-time work.
This was enough to bring the unemployment rate down to 4.0%, which ANZ Bank economist Dr Alex Joiner notes is the lowest rates since the September quarter of 1974. The numbers mean annual employment growth remains in the range of 2.5-3.0%, Joiner noting while the supply side is strengthening to meet this demand it is simply not growing fast enough to prevent unemployment from continuing to trend lower.
Joiner makes the point the inverse relationship between inflation and unemployment suggests if the RBA does eventually succeed in bringing inflation under control the unemployment rate will inevitably move higher, while the Australian economy’s existing capacity constraints make it unlikely the rate can fall much below 4.0% in the shorter-term.
While noting labour force data is a lagging indicator and therefore today’s data is likely a reflection of the strong economic conditions of early to mid-2007, Williamson points out it may create some wage pressure, a situation that could only be alleviated by growth in the participation rate. Commonwealth Bank senior economist John Peters notes immigration and labour market reforms have added to supply but Williamson points out the participation rate remains at around 65.2%, where it has been for some time.
This means the TD Securities call for no further increases in interest rates is under some threat, as while activity and lending data is showing signs of topping ,out the labour market remains resilient, though for now Williamson retains the view rate hikes have finished.
Peters disgrees and suggests the rate tightening cycle has further to run as more needs to be done to control intensifying price pressures. CBA’s forecast calls for one more hike in May, bringing official rates to 7.5%.