Steady unemployment rate poses rate uncertainty: Economists

Australia’s unemployment rate has dipped to 3.5 per cent, with almost 33,000 extra people gaining jobs last month, while 11,000 became unemployed, according to data released today by the Australian Bureau of Statistics (ABS).

However, in seasonally adjusted terms, the May unemployment rate was revised down to 3.5 per cent, from 3.6 per cent, keeping the unemployment rate relatively steady for June.

ABS head of labour statistics Bjorn Jarvis said the data highlighted the significance of the record-high employment-to-population ratio of 64.5 per cent, which reflects a tight labour market, where employment has recently increased in line with population growth.

“In addition to there being over a million more employed people than before the pandemic, a much higher share of the population is employed,” he said.

Despite the steady unemployment rate in June, economists have expressed surprise at the resilience of the labour market amid economic challenges.

AMP economist Diana Mousina described the labour force’s strength as “unquestionably strong” and noted that they had anticipated a higher unemployment rate due to the contractionary impact of higher interest rates.

The Reserve Bank of Australia (RBA) had also predicted a 3.6 per cent unemployment rate by June.

Moving forward, there are growing expectations the unemployment rate will increase, with Ms Mousina expecting it to reach 4.5 per cent by mid-2024 that would be “consistent with a further slowing in GDP growth”.

She also warned that while the unemployment rate was a lagging indicator of the economy, it is usually “the last thing to turn before a growth slowdown”.

The RBA’s July minutes acknowledged the lag between cooling economic activity and its impact on the labour market, with the board expressing concerns over weak productivity contributing to rising unit labour costs and observed that the unemployment rate had “surprised on the upside” by declining to 3.6 per cent.

Commonwealth Bank economist Harry Ottley agreed the labour market was resilient despite economic headwinds and expects unemployment rate to rise this year, given the high number of jobs required to keep it steady.

“As we have been flagging for some time, high migration inflows mean a larger than normal number of monthly jobs are required to keep the unemployment rate steady,” Mr Ottley said.

The major bank remains of the view that the central bank will increase the cash rate by 25 bps at the August board, with a terminal rate of 4.35 per cent.

In light of the data, ANZ held its view the RBA will extend its pause, keeping the interest rate at 4.1 per cent.

All eyes will be on next week’s monthly inflation figures to firm up economists’ estimates on the central bank’s next move.

Business confidence weakens

CreditorWatch’s chief economist Anneke Thompson anticipates emerging weakness in the labour sector in the second half of 2023.

Given major companies like Telstra, Lendlease, and Westpac have already announced redundancies as part of restructuring, there is a potential slowdown in hiring amid weakening business conditions and profit margins.

“Businesses are less prepared to offer credit to poor paying customers, as cash is now so critically important,” Ms Thompson said.

“Today’s [unemployment] rate will not help the RBA solidify their position ahead of August’s board meeting.”

In addition, the National Australia Bank’s business data survey for June, revealed wage costs remain the biggest concern for firms alongside pressure on margins.

The survey showed growth in overall product prices moderated, but retail price growth ticked up and at 1.1 per cent in the quarter – well above normal levels.

NAB chief economist Alan Oster said: “Conditions are still a little above their historic averages but have fallen a long way from the highs seen in 2022, indicating the economy has slowed as the year has gone on.

“Forward looking indicators in the survey have also softened, indicating firms expect there is further slowing to come.”

Mr Oster highlighted that despite business confidence being negative for some time, the data now provides “concrete” evidence of the prevailing negative outlook.

[Related: Mortgage costs weighed on RBAs cash rate decision]