Aussie Unemployment Rate Falls

Aussie Unemployment Rate Falls

Australia added another massive number of jobs in May, registering total employment growth of 39,400 (JPMorgan 5,000, consensus 10,000) following on from a solid 34,900 increase in April. April’s employment numbers were, however, revised considerably lower from an original estimate of 49,600, a figure that was already inflated by the way the employment series was seasonally adjusted in order to account for Easter falling in the April month.

The increase in jobs in May was attributed entirely to a rise in full-time jobs (up 66,800), while part-time jobs fell (down 27,400). As such, although the participation rate ticked up 0.1 percentage point to 65%, the unemployment rate fell 0.2 percentage points to 4.2%, the lowest since 1974.

The employment print certainly surprised on the upside. The new method of estimation applied to the labour force data in May which was set to produce “estimates of employment and unemployment which are slightly lower on average than those produced by the current estimator,” according to the Australian Bureau of Statistics (ABS). The ABS noted that the employment estimates were 0.7% lower on average under the new estimation methods, while the unemployment estimates were 1.6% lower, and the unemployment rate was 0.08 percentage points lower. The participation rate, meanwhile, was 0.10 percentage points lower on average, based on the new method.

Nevertheless, the Australian labour market clearly remains as tight as a drum. With unemployment at more than three-decade lows and the economy still running close to full capacity, the RBA will justifiably maintain a strong tightening bias going forward. Strong jobs growth, low levels of unemployment, and widespread skill shortages, mean that upward pressure on wages persists, adding upside risks to inflation. Additionally, the fiscal stimulus announced in the recent Federal Budget (more of which is expected in the run-up to the election) will certainly add to inflationary pressures.

That said, headline inflation is expected to fall below the RBA’s 2-3% target range in 2Q and 3Q, primarily due to beneficial year-ago base effects. Thereafter, rising food and electricity prices resulting from widespread drought conditions will push headline CPI toward the top end of the central bank’s comfort zone. JPMorgan thus expects that the RBA will lift interest rates in February 2008 to 6.5% following the release of the 4Q CPI print.

That said, today’s strong employment numbers, particularly the steep rise in full-time jobs, have heightened the risk of an earlier tightening.

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