Did the Australian labour market end 2020 on a high note?

Economist's View

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The end of 2020 brought to a close one of the most tumultuous years in Australia’s modern history and included the sharpest economic contraction in Australia since the Great Depression. However, looking back at Australia’s economic performance over 2020, there were some positive surprises as well.

After Australia’s stock market plunged by over 36% in the space of a month from late-February to late-March, the S&P/ASX 200 then rallied 45% over the remainder of the year finishing December only around 8% short of its pre-COVID February level (which was also an all-time high). The national housing market went one better with house prices finishing the year in positive territory, up 3%, with Melbourne the only capital city where prices fell over the 12 months to December. Retail sales also surprised by maintaining strong growth into year-end, with consumers having substituted away from services and towards goods as a result of COVID-19 restrictions. Data for November indicated that the value spent on retail sales was 13.3% higher than a year earlier.

Perhaps most significant however, has been the remarkable recovery in Australia’s labour market. The initial outbreak of COVID-19 in Australia last March caused a dramatic shock to the labour market. In just three months from March to May, employment in Australia contracted by 6.7%, a loss of 878,000 jobs. The unemployment rate surged 2 percentage points to 7.1% over the same period, rising further to 7.5% by July, a number that would have been much higher if not for the federal government’s JobKeeper program keeping many people classified as employed even when they were working no hours. At this stage the outlook seemed grim. Both the RBA and Federal Treasury expected the unemployment rate to reach around 10% even with the help of JobKeeper, with little prospect of decent employment growth for the remainder of the year.

Yet by November, Australia had recovered 734k jobs, leaving the level of employment just 1.1% short of its pre-COVID level. Instead of rising further, the unemployment rate had been subsiding, falling to 6.8%, while the participation rate had quickly returned to a record high. Next week, the Australian Bureau of Statistics releases labour market data for the last month of 2020. Will the data show that the labour market ended the year on a high note? We think it will.

Victoria’s labour market has boosted national numbers since October as it re-emerged from lockdown, however it still remains behind the rest of Australia in its recovery, and is likely see further gains in December. Meanwhile, with the country managing to stay largely COVID-19 and lockdown free for December, the rest of the labour market is also likely to have continued its recovery. We estimate that employment lifted by around another 0.4% (50,000 jobs) in December, enough to see the unemployment rate dip further to 6.7%.

The resilience of Australia’s labour market in 2020, combined with significant fiscal measures, helped to prop up Australian households’ incomes in the face of pandemic lockdowns, which in turn allowed household consumption to drive Australia’s economic recovery. However, with employment having performed so spectacularly, and with further winddowns of JobKeeper occurring, what are the prospects for Australia’s labour market in 2021? And with other fiscal measures that support incomes also winding down, will this constrain the ability for the consumer to continue to drive growth until vaccines can be rolled out and business and exports can shoulder more of the burden?

In our view, provided COVID-19 can remain well contained in Australia, the outlook remains positive. The labour market has already faced a tightening of JobKeeper requirements from late September, which resulted in a significant fall (over half) in the number of JobKeeper recipients. However, employment has continued to recover strongly since then, and the sharp fall in the number of employees working zero hours shows that many workers have successfully transitioned back from being ‘stood down’ to genuinely working again. Further scaling back of JobKeeper is similarly unlikely to derail continued employment recovery over the first half of 2021.

Despite the employment gains, household income will nonetheless be under pressure as other fiscal measures roll off. However, the worst of this has already passed, with households having already faced a sharp cut to the JobSeeker coronavirus supplement and the cessation of the government’s $750 cash payments in the fourth quarter of 2020. In fact, we estimate that the reduction of fiscal measures likely resulted in a fall in household disposable income of as much as 4% (almost $20 billion) in 2020Q4. Yet we also expect 2020Q4 will have been another quarter of strong consumption growth, supported by the large pool of savings households have built up through the pandemic, and this has so far been borne out by strong retail numbers and consumer confidence through 2020Q4.

Further reductions of these income support measures will be less severe going forward, and with strong savings buffers, rising asset prices, high confidence and growing employment, we think the consumer can continue to rebound and support GDP growth this year until a vaccine is distributed and the economic recovery broadens to business investment and services exports.

Table 1: Financial market movements: 7 - 14 January 2021

Source: Bloomberg