Employment growth in Australia has accelerated so far in 2018 and to a point that is causing the unemployment rate to fall quite rapidly. Full-time employment has been growing faster than total-employment this year as well and the trickling growth in wages is starting to gain some pace. There appears to have been a quite pronounced tightening in labour market conditions that has gone largely unremarked in market commentaries. This tightening in labour market conditions is likely to continue given that local monetary policy still set to boost growth and with added reinforcement from rising terms of trade lifting Australian real net national income.
The acceleration in employment growth during in 2018 so far is impressive. In the most recent three-month period ending with the October data released last week total employment rose by 85,900. The increases in previous three-month periods this year were 71,000 in the July ending period and 17,300 in the April ending period. The improvement in full-time employment is even more substantial, 103,300 in the three-months ending October from 49,300 in the July ending period and 30,300 in the April ending period.
Although more people have been attracted to enter the labour market in 2018 causing the labour force participation rate to lift to a record 65.7% at one point (it was close to that record high in the latest October reading at 65.6%) employment growth has been strong enough to generate a sharp decline in Australia’s unemployment rate from 5.6% in December 2017 to 5.0% in both September and October 2018.
Strong labour market conditions in 2018 are starting to show through in a modest lift in wages growth. The latest wage price index report for Q3 2018 released last week showed annual wages growth at a three-year high 2.3% y-o-y, up from 2.0% a year earlier in Q3 2017. Given the increasing tightening of the labour market through 2018 it is reasonable to expect that acceleration in annual wages growth will probably better the lift over the past year – annual wages growth will lift to at least 2.6% y-o-y by this time next year.
Returning to current annual wages growth of 2.3% y-o-y that is only the part of the story in terms of support for household income. Annual growth in employment matters too and the total wages being paid to households is currently growing close to 6% y-o-y. By this time next year total wages are likely to be growing close to 6.5% y-o-y, the fastest pace in more than a decade.
This relatively strong growth in total wages helps to explain why in the face of a bank housing credit crunch and falling house prices households are still quite chirpy. The Westpac November consumer sentiment index lifted 2.8% after increasing by 1.0% the month before and the results came at a time when the Australian press was awash with negative stories of falling house prices and enfeebled government.
Most of the props supporting strong growth (well above 2% y-o-y) in employment remain in place. Many industry sectors are growing well above the 3.4% y-o-y growth rate exhibited by the general economy in Q2 2018. Public administration and administration and support services grew respectively 4.1% y-o-y and 4.2% y-o-y. Both sectors are huge employers. The single biggest employer in the economy, health services grew 7.2% y-o-y and that growth is showing no signs of diminishing. Mining and construction grew respectively 5.1% y-o-y and 5.5% y-o-y and are increasing their already strong demand for labour. Professional, scientific and technical services grew 4.6% y-o-y and are lifting demand for highly-skilled workers. Arts and recreation grew 5.5% y-o-y.
There is no reason why these fast-growing industry sectors are going to slow and between them they are generating more than 60% of the current rapid growth in employment. While that strong growth in employment continues households are likely to continue to spend comparatively freely. The housing credit crunch and falling house prices will not halt growth in the economy but they may help to temper what would otherwise be a boom in the economy requiring large and rapid increases in local interest rates to prevent inflation pressure building up too much.
It is fair to say that many market commentators have over-dosed on gloom pills and are ignoring the strong growth momentum in the Australian economy and its potential impact on wages and inflation. At some point strong data readings will influence a more positive change in those views. Over the next few months we see Australia’s GDP growth rate lifting above 3.5% y-o-y, the unemployment rate falling towards 4.5% and wages growth accelerating to 2.5% y-o-y. Those readings would force noticeably more positive market commentaries. Those readings would also make it very hard for the RBA to rationalize leaving the cash rate at an emergency low 1.50% much beyond Q1 2019.