Australian labour market forges ahead

Principal Economist's View

Despite weakening sentiment around the prospects for the Australian economy, businesses and governments managed to add 39.1k jobs in January, well above our (20k) and consensus expectations (15k). The annual rate of job creation has consolidated at 2.2%, outstripping population growth by over ½ percentage point.

The unemployment rate is also consolidating at 5%; the level commonly accepted to be consistent with full employment. While wage growth remains below its full-employment rate, which we estimate to be 3.5%, it has clearly lifted from its bottom of 1.9% (formed over 2016/17) and has been gradually edging higher to a 2.3% annual pace (as measured by the Wage Price Index).

Tighter labour market conditions are particularly evident in New South Wales, where the unemployment rate dropped from 4.3% to 3.9% in January. A level this low has not been seen since the early 1970s.

Similarly, labour market conditions have also improved significantly in Victoria over the past year, with the unemployment rate currently at 4.5%. This is around the lows seen just before the GFC and again at a level not seen on a sustained basis since the early 1970s.

Clearly, the public infrastructure booms underway in New South Wales and Victoria are currently supporting strong employment growth in both states. With a large pipeline of work yet to be done, this bodes will for ongoing robust employment conditions.  

The improving labour market conditions are also starting to lift wage growth in these two states. This is particularly apparent in Victoria, where annual wage growth firmed from 2.5% in the September quarter to 2.7% in the December quarter, a significant improvement from its low point of 1.9% in late 2016. Wage growth in New South Wales is also improving, albeit to a lesser extent, reaching 2.4% in the second half of 2018 compared to 2.1% in the first-half of the year.    

Strength in these labour markets is particularly important given the correction in house prices is largely confined to the capital cities in these two states. With such strong employment growth, low unemployment and wage growth creeping higher, the outlook for household income looks constructive. Forthcoming tax cuts for low and middle-income earners will also boost household disposable incomes over the next years.

In our view, the improving outlook for disposable income in New South Wales and Victoria will help counter the negative wealth effects from lower house prices. This will help hold-up retail sales in both states.

Outside New South Wales and Victoria, more slack remains evident in the labour market. Nonetheless, the recent improvement in commodity prices and an end to the mining investment downturn will help support economic activity and employment growth in these resource states.

This is important as these states have largely been responsible for the softer retail sales over recent years. During 2018, aggregate retail sales growth in the resource states averaged 1.3% compared to 3.7% in the non-resource states. Improving prospects for the mining states will help counter the loss of momentum from the housing-impacted slowdown in Sydney and to a lesser extent Melbourne.

In our view, Australian retail sales can hold-up despite the slowdown in the housing market, with retail sales growth expected to firm from 3% in 2018 to 3.8% in 2020. Although the downturn in the housing market will continue to impact household goods retailing, with lower housing turnover leading to less spending on replacement whitegoods, furniture and other fittings, the improving labour market trends will support sales from other retailers.

The labour market data seen this week provide comfort that our view on Australian consumer resilience remains on track. And if the consumer can hold-up, the economy will be able to remain on a solid footing.  

Table 1: Financial market movements, 14 – 21 February 2019

Equity index

Level

Change

10-yr government bond

Yield

Change

Foreign exchange

Rate

Change

S&P 500

2,774.9

1.1%

US

2.69%

3.8 bps

US Dollar Index (DXY)

96.61

-0.4%

Nikkei 225

21,464.2

1.5%

Japan

-0.04%

-2.4 bps

USD-JPY

110.70

0.2%

FTSE 100

7,167.4

-0.4%

UK

1.20%

5.2 bps

GBP-USD

1.304

1.9%

DAX

11,423.3

3.0%

Germany

0.13%

2.4 bps

EUR-USD

1.134

0.4%

S&P/ASX 200

6,139.2

1.3%

Australia

2.06%

-9.1 bps

AUD-USD

0.709

-0.2%

Source: Bloomberg

For economic update by region, click here

 

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