Australia | Jan 15 2010
By Andrew Nelson
Australian employment finished the year on the same note it has been playing for pretty much the last year and a half, well above consensus. And the fact that we have now clearly shifted into recovery mode with an unemployment rate that is significantly below the levels of past recoveries will have the Reserve Bank thinking long and hard about another rate hike in February.
All up, the December read increased by 35,200, versus expectations for an increase of just 10,000. This makes for an uninterrupted run of better than expected results since August, with the report only missing the target twice in the past 18 months. Unemployment fell to a seasonally adjusted 5.5% in December from 5.6% in November, according to the Australian Bureau of Statistics, while full-time employment rose 7,300 and the number of people in part-time work rose 27,900.
The Aussie dollar jumped from US92.50c to US92.80c after the result, and subsequently continued its run above US93c.
State-level data were also pretty surprising, with Victoria taking first, second and third place as the nation’s job creation engine. Victoria has accounted for around half of the 147,000 jobs created over the past six months, with employment growth in the state running at an annualised pace of almost 6% over the past half-year. The takeaway from this is that the current recovery is not a resources driven phenomenon.
This latest set of jobs data seems to more than confirm the Australian economy has been in recovery mode since the second half of 2009, with 135,700 jobs created since August. This is the fastest pace of job creation since mid-2006 and seems to support the RBA’s decision in the latter half of last year to become the first central bank in the G20 to start lifting interest rates.
With a renewed commodity price boom building on the horizon [see yesterday’s FNArena article: The Global Commodities Outlook Continues To Improve], economists are now starting to worry that labour shortages – which will only intensify on the back of Canberra’s infrastructure spending spree and an organic construction recovery as the recovery continues – will start contributing to inflation. In fact, inflation expectations have rebounded and are back at the top of the RBA’s 2-3% target band for inflation.
The nation’s central bank probably wouldn’t have expected unemployment to be dropping so soon and so fast and must be getting worried that falling unemployment will spark some catch-up in wages. While jobs may have held steady, wages have taken a hit due to the drop in hours worked over the past year. Economists at RBS note survey measures of labour costs are stirring as forward indicators of employment resume growing at a strong pace.
In fact, says Commonwealth Securities chief economist Craig James: “If policy makers and businesses are going to worry about anything in coming months it is that the job market is tightening too quickly. Full employment is considered to be a situation where unemployment is around 5% and that is certainly not far away.”
It should be far from surprising then that consensus from the Australian broker community is pretty much unanimous in terms of the likelihood, or should we say near certainty of another interest rate hike in February. Taking a quick straw poll of broker comments this morning, we have six votes for a rise (Morgan Stanley, RBS, BA Merrill Lynch, Macquarie, GSJB Were and Deutsche Bank) and one maybe from Citi.
Morgan Stanley economist Gerard Minack says another 25 point tightening at the February board meeting is “quite likely”, while the Australian team from RBS, who were already certain of a rise before the jobs read, are even more certain and think the RBA may even bump up its inflation forecast profile when it updates its outlook in the February statement. Yet while RBS thinks the jobs numbers make the February rate decision less sensitive to the January 27 CPI outcome, analysts from Citi aren’t as convinced.
A report from Citi’s Josh Williamson and Paul Brennan argues that the key data for the February RBA meeting is still the CPI report. The team from Citi believes that the underlying inflation result will not provide the trigger. They reason as while the jobs read proves just how inappropriate it was to keep the cash rate at 3.0%, now that we’ve seen 75bp in rises over the past few months, the team feels the RBA has at least a month’s worth of breathing room that will leave it still able to reach an “optimal level” by year end.
On the other hand, GSJB Were chief economist Tim Toohey and team believe that despite the rate hikes delivered in late 2009, current monetary policy is still too accommodative in what seems to be an environment of “rapid domestic recovery, limited economic slack and rapidly rising house prices”. Thus the team from Weres continues to expect 25bp rate hikes at each of the next three meetings, which would take the cash rate to 4.5%.
Economist John Rothfield from BA-Merrill Lynch rates the chances of a fourth successive rate hike on February as being “extremely high”. Besides the robust jobs environment, he cites positive retail trade, strong building approvals for November and strength in China’s economic data, which in turn will see higher prices for Australian iron ore and coal and thus improving national terms of trade.
Lastly, Deutsche Bank Chief Economist Tony Meer is a little more cautious about the string of strong unemployment reads, as he had been expecting the pull of part timers back to full time would have had a greater impact than it has. Still, says Meer: “if it were not for a fall in the average number of hours worked per week employment would also have been ‘soft’ as expected.”
Yet, while Meer still believes that the official employment count will at some stage underperform the true pace of employment creation and a rise in average hours worked will slow the down trend in the unemployment rate, he also thinks it will be a few more months before such a trend would be clearly identifiable. Thus, with four robust employment reports in a row, coupled with a run of generally robust domestic and global activity data since the RBA’s last board meeting, a further 25bps rate hike in February is regarded “likely”.