David Bassanese
3 minutes reading time
If there was ever the slightest chance the RBA could have played Santa and delivered a surprise rate cut at its final meeting of the year next month, it was effectively wiped out following today’s firm labour market report.
Overall employment grew by 42.2k in October, following a gain of 14.9k in September. The unemployment rate dropped from 4.5% to 4.3%, with October’s 17k decline in the number of unemployed partly reversing the 32k surge in September. Today’s report, at least, should lessen fears that the employment market is on the cusp of serious deterioration.
So far this year, monthly employment growth has lived up to its reputation of being inherently volatile. We’ve endured a few nervous months this year, with employment slumping by 62k in February, barely growing over May and June and declining again by 10k in August. But these growth scares have been interspersed with strong employment bounce backs, such as the 91k gain in April, the 35k gain in July and the combined 55k gain seen over the past two months.
Judging by the usually less volatile unemployment rate, the labour market has weakened this year, but only modestly. Since June, the unemployment rate has averaged around 4.3%, up from around 4.0% earlier in the year. This modest loosening in the labour market is consistent with leading employment indicators, which have eased a little over the past year but remain either at or only slightly below long-run average levels.
The challenge for the economy, and those counting on lower interest rates, is that some modest easing in labour market conditions may be required to ensure a reduction in underlying inflation to back with the RBA’s 2-3% target band. Indeed, although the pace of employment growth has slowed, the RBA still considers the overall level of labour market conditions as reasonably “tight”.
That is true of the economy more broadly where, despite generally sluggish growth in recent years, measures of spare capacity remain at relatively low levels. The bounce in inflation in the September quarter, following a strengthening in consumer and housing demand earlier this year, also point to a relatively supply constrained economy – lacking the ability to grow strongly anytime soon without re-igniting inflation pressures.
All up, today’s report will affirm the RBA’s view that the labour market and the economy more generally remains relatively “tight”. This will limit its ability to support stronger economic growth through lower interest rates anytime soon. Rates can be cut next year, however, it will require strong evidence of an easing in inflationary pressures or a greater weakening in the economy than seen to date.