Another labour market report full of surprises

Economist's View

Download the PDF version including our economic update by region here: Another labour market report full of surprises

Since the beginning of the COVID-19 pandemic, the most consistent feature of Australia’s labour force data has been its tendency to throw out surprises, and the October report released on Wednesday was certainly no exception. With Victoria’s strict lockdown extending into October, and the rest of Australian employment also losing momentum the prior month, economists were anticipating another downbeat report, with the median Bloomberg forecast pointing to a 30,000 fall in jobs in the month.

We were more optimistic expecting a small rise in jobs, but were also surprised as the report revealed a gain of 178,800 jobs in October, a 1.4% increase and the second largest monthly rise in the history of the data (behind only the 228,800 gain in June as the economy emerged from nationwide lockdown).

Perhaps more surprising was that almost half of the gain came from an 81,600 (2.5%) rebound in employment in Victoria, the largest on record by far, despite the fact that lockdown measures only eased meaningfully after the October survey period. The rebound in jobs came alongside a 2 percentage point (ppt) rise in the participation rate, due in part to a rise in out-of-work people actively seeking work, thereby rejoining the labour force and becoming classified as ‘unemployed’. As a result, despite the huge employment rebound, Victoria’s unemployment rate rose 0.7ppt to 7.4%.

Even after the stunning rebound, employment in Victoria remains almost 4% lower than it was in February, with 130,000 fewer jobs. But with the Victorian economy having reopened from mid-October, the prospects for further recovery are good.

Not to be outdone, the rest of Australia’s labour market also showed surprising strength, with a gain of 97,200 jobs in October. As a result, total employment in Australia has recovered by around 650,000 jobs, almost 75% of the 875,000 jobs lost over February to May. The participation rate has almost completely recovered reaching 65.8%, just 0.1ppt lower than its 2019 average. In addition, by our calculation, the participation rate for Australia ex-Victoria has not only completely recovered, but at 66.10% is the highest on record.

The positive labour market report was all the more surprising having come just two weeks after RBA Governor Philip Lowe revealed that the RBA Board viewed high unemployment as a national priority. With an expectation of slow job creation and high unemployment going forward, the RBA announced further easing measures as a result. In particular, this included a large QE program, with Dr Lowe stating “lower interest rates and our plan to buy $100 billion of government bonds over the next six months will help people get jobs and support the recovery of the Australian economy”.

The RBA’s updated forecasts that underpinned the historic move were released the same week, including an expectation that employment would reach around 12.66 million by the June 2021 quarter, still 2.6% short of its pre-COVID level. Yet as a sign of how quickly the picture has changed, employment in Australia is now already at 12.77 million people, just 1.7% below its pre-COVID level. With Victoria conquering the virus, solid progress being made with vaccines, business and consumer confidence surging, and retail sales booming, the outlook looks good for further labour market gains. So, has the RBA embarked on its historic QE program on a misjudged view of the labour market? And with the RBA only about $12 billion of the way into its $100 billion of planned bond purchases, should the RBA throttle back its program?

In our view, the case for continuing the QE program remains just as strong.

While the strength of the October employment data is pleasing and will have surprised even the RBA, it has still occurred in an environment of strong policy support, particularly fiscal stimulus measures such as JobKeeper extensions that are continuing to support employment, and the myriad of measures that have propped up household incomes and consumer spending.

The economy and the labour market are not out of the woods yet, and the RBA is right to take seriously the challenges that the labour market will face as these measures roll off and as businesses face cost pressures in an environment where domestic and external demand are still below pre-COVID levels (particularly in industries such as tourism and education, whose near-term prospects remain bleak). And while the vaccine news is good, it will be many months before it can be distributed at scale, leaving plenty of opportunity for renewed outbreaks, lockdowns, and labour market damage. The uncertainty and challenges surrounding the outlook are ample reason to provide further support.

With governments having borrowed heavily to support the economy, QE will help keep interest costs sustainable, while also lowering rates for businesses who will drive jobs growth. But the program will also help place downward pressure on our currency, which has become more necessary in recent weeks as the $A has appreciated strongly against the $US amidst the risk-on sentiment prompted by the positive vaccine news.

Importantly, in the current environment there is little downside to further easing through measures such as QE even if the recovery continues to surprise on the upside. Inflation remains stubbornly low, as reinforced by the new record low wage growth data released during the week. October’s labour force data shows that the combined fiscal and monetary levers are working well, but when the risk of overheating the economy is so low, the RBA has little to lose by keeping the foot on the monetary easing pedal and turbocharging the economic recovery even further.

Table 1: Financial market movements: 12 - 19 November 2020

Source: Bloomberg