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Gradual loosening in the jobs market not consistent with near-term rate cuts, economist says

3 minute read

According to an economist, for the RBA, the key question will be whether the very gradual loosening in the jobs market will be enough to continue to drive disinflation in the economy.

The seasonally adjusted unemployment rate rose by 0.1 percentage point to 3.8 per cent in March, according to data released today by the Australian Bureau of Statistics (ABS).

The rate came in below expectations of 3.9 per cent.

Bjorn Jarvis, ABS head of labour statistics, said: “With employment falling by around 7,000 people and the number of unemployed rising by 21,000 people, the unemployment rate rose to 3.8 per cent.”

The small drop in employment in March followed a larger-than-usual flow of people into employment in February, following smaller-than-usual flows in December and January, the ABS explained.

“The labour market remained relatively tight in March, with an employment-to-population ratio and participation rate still close to their record highs in November 2023,” Jarvis said.

“While they have both fallen by 0.4 percentage points since then, they continue to be much higher than their pre-pandemic levels.

Namely, as a result of the fall in employment and the pace of growth in the population, the seasonally adjusted employment-to-population ratio fell 0.2 percentage points to 64.0 per cent and the participation rate fell 0.1 percentage point to 66.6 per cent.

Seasonally adjusted monthly hours worked rose by 0.9 per cent.

In trend terms, Jarvis said the growth rate in employment and hours worked was weaker than the strong growth during late 2022 and early 2023. However, the recent trend data still point to a tight labour market.

CBA on Wednesday said it expects the unemployment rate to rise to 3.9 per cent.

The unemployment rate in Australia grew to 4.1 per cent in January before quickly subsiding to 3.7 per cent on the back of a large lift in employment in February.

Potential repercussions

Commenting on the latest data, Paul Bloxham, HSBC’s chief economist, said: “For the RBA, the key question will be whether this very gradual loosening in the jobs market will be enough to continue to drive disinflation in the economy.

“In particular, the challenge is that wages growth is currently too rapid to be consistent with the RBA’s 2–3 per cent inflation target given weak productivity outcomes. That is, unit labour costs, which are a measure of wages adjusted for productivity, are running too rapidly.”

Referencing historical data, Bloxham said getting unit labour cost growth to slow – either by slowing wages growth or lifting productivity – has typically required the unemployment rate to rise by “quite a bit more than has occurred in this cycle so far”.

“Indeed, as we have pointed out previously, to get inflation to slow as much as the RBA is forecasting has historically only occurred with an unemployment rate that has risen by a lot more than the RBA is currently forecasting.

“Today’s figures provide more evidence that it is still far too soon for the RBA to be considering rate cuts and that there is still a non-zero risk that the cash rate may yet have to be lifted further – that is, the next cash rate move could be up, not down.”

HSBC’s central case is that the cash rate is held steady through 2024, with cuts beginning in Q1 2025.