Key labour market data released last week show more buoyant conditions than in July last year, notwithstanding a small lift in the unemployment rate to 4.2% in July. The strength of the labour market adds to reasons why the RBA cannot begin to reduce the cash rate in the near term – the next 6 months in the repeated definition of the near-term given last week by RBA Governor, Michelle Bullock.
Our view is that it will be more than 6 months before the RBA can cut the cash rate given the evidence contained in the July labour force report that employment is growing faster than the latest RBA forecasts contained in the August Monetary Policy Statement published only two weeks ago.
Australia has recorded back-to-back 50,000+ increases in total employment in June and July 2024. In the three months ending July 2024, employment rose by 151,700. In the previous three-month period ending April, employment rose by 153,900 meaning that more than 305,000 jobs were added in the six months ending July 2024.
Back in the same periods of 2023, when the labour market was viewed as running red hot, 126,600 jobs were added in the three months ending April and another 95,500 in the three months ending July for a six-month period total of 222,100, more than 80,000 less new jobs than have been created this year.
Every economic forecaster, including the RBA, has been blindsided by the strength of employment growth over the past six months. Annual growth in employment is running at 3.2% y-o-y in the July 2024 labour force report. Back in May, the RBA was forecasting mid-2024 employment growth at 2.1% y-o-y and end-2024 employment growth at 1.4% y-o-y.
In early August Monetary Policy Statement the RBA had to revise upwards their employment growth forecast for end-2024 to 1.9% y-o-y, but that forecast is looking too low already in the wake of the July labour force report. Employment would need to fall by 49,000 over the next five months, an average 10,000 monthly fall, to make the RBA’s latest forecast.
Most forecasters, including us, expect less strong employment growth over the remainder of this year relative to the past six months, but it is unlikely that employment growth has dived off a cliff taking the monthly average employment growth rate down from +50,000 over the past six months to -10,000 over the next five months. It is likely that when the RBA produces its next set of economic forecasts in November it will need to revise higher end-December 2024 employment growth.
That upward revision to employment growth in November, together with the upward revision that occurred in August means another big support for growth in household disposable through 2024, especially in the second half of the year running off the big lift in employment (and wage income) in the first seven months.
Higher household disposable income growth in turn means a greater likelihood of stronger household spending growth. There is some evidence that stronger growth may have started in monthly retail sales data.
May and June 2024 retail sales have been quite firm at respectively +0.6% m-o-m and +0.5%. The average monthly change in retail sales through the first six months of 2024 is +0.4%, against an average of just over +0.1% in the last six months of 2023 and less than +0.1% over the first six months of 2023. Annual change in retail has lifted from a cycle low point of 0.8% y-o-y in December 2023 to a one-year high of 2.9% in June 2024.
It is highly likely that retail spending will grow more strongly over the remainder of this year bolstered by past strong employment growth, tax cuts, government cost-of-living support measures coming into play and wage growth. The Q2 wage price index out last week showed wages up 4.1% y-o-y, the same annual growth as recorded in Q1 and unlikely to be much lower over the remainder of this year given the strength of the labour market shown in employment growth numbers.
In the August Monetary Policy Statement the RBA forecasts that household consumption will be up 1.1% y-o-y in the approaching Q2 GDP report accelerating to 1.5% y-o-y in Q4. Both forecasts were revised upwards from respectively 0.1% and 1.3% in the May Monetary Policy Statement. Given that the RBA’s employment growth forecasts are running too low, household consumption forecasts look set for upward revision again in November.
The prolonged and under-forecast tightness of the labour market increases the likelihood that household consumption and general aggregate demand are improving faster than the RBA has forecast in the August Monetary Policy Statement.
The RBA’s latest forecasts have led the RBA Governor to state that demand in the Australian is still running faster than output growth and as a result it is taking longer to get inflation consistently inside 2-3% target band. In our view the Governor will still have cause to make a similar statement when the next set of RBA economic forecasts are released in November and probably again in February next year. That is why we do not see any opportunity for the RBA to start to reduce the cash rate below 4.35% until Q2 next year.