RBA still tipped to raise rates as jobs data blurs

CreditorWatch Chief Economist Ivan Colhoun said Australia's latest labour force figures still left the Reserve Bank of Australia likely to raise interest rates next week, though the data sent mixed signals about the strength of the labour market.

Employment rose by 39,500 in August, well above forecasts for a gain of 20,000. Part-time jobs increased by 46,000, while full-time employment fell by 6,000.

At the same time, the unemployment rate rose to 4.6% from 4.5% in July. Colhoun noted the figure was close to rounding up to 4.7%, and that unemployment has now risen 0.5 percentage points since December.

The combination of stronger employment growth and higher unemployment pointed to a rise in labour force participation. That helped explain the apparent contradiction in the data, although Colhoun also questioned how much confidence should be placed in the monthly figures.

He pointed to changes in the Australian Bureau of Statistics survey process, unusual movements between people being outside the labour force and then counted as unemployed, and a reversal in earlier underemployment data as reasons for uncertainty about the underlying picture.

"Somewhat contradictory labour market data today, which mean the messages can't fully be trusted especially given the ABS is making some changes to the survey. At face value, employment growth remains quite reasonable at around 24,000 per month and above the rate required to keep the unemployment rate stable (around 20,000 per month). But the unemployment rate has jumped 0.5 percentage points since December - not something that usually coincides with reasonable employment growth. Higher participation squares this circle this month, but a significant reversal in the prior reported rise in the underemployment rate makes me question the reliability of the data somewhat," said Ivan Colhoun, Chief Economist, CreditorWatch.

Despite those reservations, the broader trend still suggested some easing in labour market conditions. Colhoun said policymakers could take that as a sign that wage pressures may start to moderate over time.

The labour market matters closely to the central bank because it feeds into wages and inflation. Colhoun argued wage settings had been part of the reason inflation remained above target, alongside broader cost pressures in the economy.

"Again, at face value, the trend rise in the unemployment rate will not be unwelcome (rather than be welcome) news for the RBA, in that it suggests some loosening of the Australian labour market is occurring. This should help moderate wages growth in time. The latter more broadly and specifically in relation to the unwise quantum of the Fair Work Commission's minimum and award wage increases this year, has been a large part of the fundamentals keeping Australian inflation above target," said Colhoun.

Rate outlook

The latest figures are unlikely to alter the immediate policy outlook, with the Reserve Bank still expected to lift rates at its next meeting. Colhoun said recent inflation readings had remained too strong and officials were concerned inflation expectations could start to shift higher.

In his view, the labour data may matter more for what happens after the next decision. If softer conditions persist, that could reduce the case for another increase soon afterwards.

"This data does not mean the RBA will not increase interest rates next Tuesday as the Bank has been unpleasantly surprised by recent inflation prints, is detecting some possible de-anchoring of inflationary expectations and has continually failed to lower Australian inflation to target. It might reduce the likelihood of a quick follow-up rate rise in November if the labour market data do not reverse in September," said Colhoun.

Business impact

Higher rates would not be welcomed by many businesses, Colhoun said, but prolonged cost growth had also been damaging for companies. He added that he did not expect a large number of further increases in the near term.

"While the news isn't likely to be welcomed by Australian businesses, controlling inflation is important. Businesses are experiencing the significant downside of costs having continued to rise at excessive rates for an extended period. Fortunately, it seems unlikely that there will be the need for more than two interest rate rises in the near term," said Colhoun.

Other signals

Beyond the headline figures, Colhoun said he was watching underemployment and youth unemployment for earlier signs of a shift in labour demand. Youth unemployment rose by 0.4 percentage points in August, although the recent trend had not moved sharply higher.

He also pointed to the SEEK job advertisements series as a useful guide to conditions. That measure softened after the Iran conflict and around the time of the first of three recent rate increases, but posted its first significant rise in seven months in August.

At the state level, he warned that unemployment figures can be volatile and should be treated carefully, particularly in smaller states. Even so, Tasmania had seen a sharp deterioration following several prominent business closures, while Victoria continued to record the highest unemployment rate among the larger states.

Queensland and Western Australia had also shown higher trend unemployment in recent months, he said, while New South Wales had been relatively stable. Overall, Colhoun said, the labour market may have softened slightly but was not showing signs of a marked deterioration.