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Labour market remains ‘very tight’ as next rate decision looms

5 minute read

The ABS has released its latest labour force data for the month of June.

Australia’s seasonally adjusted unemployment rate sat at 3.5 per cent in June, according to the latest labour force data from the Australian Bureau of Statistics (ABS), in line with the updated figure for the month of May.

According to the ABS, employment increased by 32,600 people over the month of June, while the number of unemployed people decreased by 10,900.

“The rise in employment in June saw the employment-to-population ratio remain at a record high 64.5 per cent, reflecting a tight labour market in which employment has recently increased in line with population growth,” said ABS head of labour statistics Bjorn Jarvis.

“In addition to there being over a million more employed people than before the pandemic, a much higher share of the population is employed. In June 2023, 64.5 per cent of people 15 years or older were employed, an increase of 2.1 percentage points since March 2020.”

The underemployment rate remained at 6.4 per cent while the underutilisation rate, which combines the unemployment and underemployment rates, fell to 9.9 per cent.

May’s unemployment rate originally came in at 3.6 per cent before the revision by the ABS. This followed an unexpected increase to 3.7 per cent in April.

ANZ head of Australian economics Adam Boyton said that employment growth seen in June was “relatively close” to the bank’s expectations for a gain of 25,000.

“While headline jobs growth looks robust, that needs to be considered against the backdrop of the current very rapid pace of population growth,” he said.

“While the labour market is still very tight, there are some early signs of an easing. The underemployment rate is up 0.6 ppts from its low, while NAB’s Q2 Business Survey showed the proportion of businesses reporting labour as a constraint on their output declining slightly.”

HSBC chief economist Paul Bloxham and economist Jamie Culling noted the data was one of the key pieces of information that the RBA will receive ahead of its next meeting.

“Recall, the RBA paused at 4.10 per cent in July and the board minutes indicated that the central bank was torn between a 25 bp hike, or hold,” the HSBC economists said.

“The minutes noted that the board would reassess the situation in August, with the benefit of this labour market data, as well as additional data on CPI inflation, household spending, and the global economy. The tight labour market is clearly a piece of information that would support a further hike in August.”

According to HSBC, the argument for a hike will likely be stronger than the argument for a hold in August, with the bank’s central case being a hike to 4.35 per cent.

Mr Boyton said the labour market force data was seen as being close enough to ANZ’s expectations to leave its forecast for an “extended pause” by the RBA unchanged.

In a speech last month, prior to her appointment as the next RBA governor, Michele Bullock said the strength of the labour market was “inconsistent” with the central bank’s objective of returning inflation to the target range of 2–3 per cent.

“Our assessment is that, for the first time in decades, firms’ demand for labour exceeds the amount of labour that people are willing and able to supply,” she said.

“That is, employment is above what we would consider to be consistent with our inflation target.”

Ms Bullock said the bank’s goal is to return the labour market to full employment or 4.5 per cent, marking the “endpoint” of the RBA’s forecasts for the unemployment rate.

“We think this can be achieved if employment and the economy more generally grow at a below trend pace for a while,” she stated.

“This would help to bring demand and supply into better balance and give us the greatest chance of securing sustainable full employment into the future.”

Under the RBA’s most recent forecasts in its May statement on monetary policy, unemployment is expected to rise to 4 per cent in December this year. It is then forecast to lift to 4.2 per cent in June 2024 and 4.4 per cent in December 2024 before reaching 4.5 per cent in mid-2025.

The RBA will release its updated forecasts as part of its next quarterly statement on monetary policy on 4 August, following the central bank’s next monetary policy decision on 1 August.

Prior to the release of the June labour force data, ANZ predicted an “extended pause” with the cash rate remaining at 4.1 per cent. Meanwhile, the other three major banks were all expecting that the RBA would hike in August.

Jon Bragg

Jon Bragg

Jon Bragg is a journalist for Momentum Media's Investor Daily, nestegg and ifa. He enjoys writing about a wide variety of financial topics and issues and exploring the many implications they have on all aspects of life.