Australia | Feb 11 2010
By Chris Shaw
Australian labour market data have surprised on the upside for the fifth consecutive month, with unemployment rising by 52,700 in January in a result far stronger than the 15,000 increase the market had been expecting.
Both full-time and part-time positions were added during the month, the former by 15,900 and the latter by 36,900, bringing Australia's unemployment rate down to 5.3%. This compares to an unemployment rate of 5.5% in December. January's is the lowest reading since February last year.
Westpac notes the faster than expected downtrend in the unemployment rate is being achieved despite strong labour force growth, which has risen by more than 2.0% in annual terms. The participation rate was steady at 65.3%.
CommSec chef economist Craig James suggests while the data indicate the economy is going very well, there appears to be some restraint as the big increase has been in part-time jobs and this shows businesses are not convinced the economy is totally past its worst. Supporting this view is the fact in aggregate terms there were actually less hours worked in January.
According to Westpac, the data imply the labour market is tightening faster than had been expected, which Westpac suggests poses some upside risks for wage growth in 2010/11 and for inflation into 2011.
This is significant as the Reserve Bank of Australia (RBA) had previously indicated one factor in its benign inflation forecast was the impact of weak wages growth, but Westpac sees the rapid re-tightening of the labour market suggested by today's data as presenting some risks to this view as it implies an acceleration in wage growth through 2010.
As a result the January data reinforce Westpac's expectation of a 0.25% rate hike by the RBA in March, something the market appears to be taking as more likely as well given the Australian dollar traded higher on the back of the release.
While CommSec's James doesn't see a rate hike as a certainty in March, he views today's data as increasing the likelihood of such a move happening. The market is now pricing in a March hike as a 50:50 proposition. Regardless of any move next month, James suggests his forecast of a cash rate of between 4.5-4.75% by the end of the year continues to look good.
ANZ senior economist Julie Toth suggests a 0.25% rate hike in March is now highly likely, while the risk now is for a total of 50 basis points of hikes in short order as today's data suggest the economy is now growing at an “above potential” rate, so eating into the limited spare capacity that exists.
As well, the fact monetary policy is still on the easy side of neutral while inflation appears to be at the high end of the RBA's target range suggests the cash rate needs to be 50-100 basis points higher than what it is now, with Toth taking the view today's data mean this needs to happen sooner rather than later.
Toth's timetable suggests a 0.25% hike in March, to be followed by a similarly sized move by the middle of the year.
