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Pressure remains on RBA as unemployment rises

In the absence of fiscal stimulus amid falling employment figures, the onus will be on the Reserve Bank of Australia to pull levers on monetary policy, according to AMP Capital’s senior economist.

The Australian Bureau of Statistics (ABS) has released its latest employment figures, which showed that employment fell by 19,000 jobs in October, defying the market’s positive expectations.

The fall in employment contrasts with market expectations of a gain in employment of 15,000 jobs, and follows a gain of 12,500 jobs in September.

The unemployment rate rose to 5.3 per cent again, maintaining a gradual uptick from a low of 4.9 per cent in February. The participation rate fell slightly to 66 per cent.

Shane Oliver, AMP Capital’s senior economist and head of investment strategy, said the rising trend in both unemployment and underemployment indicates that spare capacity remains high in the labour market, meaning wages growth will not improve in the near future.

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While the cash rate cuts from the RBA and tax cuts to date should help curb the rise in unemployment, they are unlikely to be enough to push unemployment down to levels needed to see stronger wages growth and higher inflation.

“Ideally, fiscal stimulus in the form of faster tax cuts, a boost to Newstart, investment incentives, and a bring forward of infrastructure spending where possible is needed from here,” Mr Oliver said.

“However, in the absence of fiscal stimulus soon, the pressure remains on the RBA where we expect to see another 0.25 [percentage point] rate cut in December, quantitative easing (possibly designed to lower bank funding costs and allow banks to pass on more rate cuts) and more dovish forward guidance on rates.”

Mr Oliver observed that November saw the biggest job losses since August 2016.

“While normal volatility in the labour market survey suggests we were overdue for a sharp decline in reported monthly employment, slowdown in trend employment growth is also consistent with a lagged response to the slowdown in the economy and a slowing in leading labour market indicators such as job ads, hiring plans and job vacancies,” Mr Oliver said.

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Annual growth in employment has slowed from a high of 3.6 per cent year-on-year in January last year to 2 per cent now. Meanwhile, full-time jobs growth has tumbled from 4.3 per cent year-on-year in January last year to 1.6 per cent now, indicating a slowdown in hours worked.

Labour market underutilisation has risen again to 13.8 per cent as underemployment rose from 8.3 per cent to 8.5 per cent. This compares to 7 per cent in the US, according to Mr Oliver.

“With jobs growth expected to slow further in Australia, labour market underutilisation is likely to rise further, and this in turn will prevent much, if any, pick-up in still weak wages growth,” Mr Oliver said.

In order to achieve full employment in Australia, labour underutilisation should be 7 per cent or less, while unemployment should be around 3.5 per cent.

[Related: No respite for RBA as weak wages growth continues]

Pressure remains on RBA as unemployment rises
Unemployment rises
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Malavika Santhebennur

Malavika Santhebennur is the features editor on the mortgages titles at Momentum Media.

Before joining the team in 2019, Malavika held roles with Money Management and Benchmark Media. She has been writing about financial services for the past six years.

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