We wrote last week that the RBA will hike rates again, most likely in February rather than at their next meeting in December. A December rate hike is back in play, however, after reports last week of a still very tight labour market in October and annual wage growth pushing up to 4% y-o-y, based on the Q3 wage price index. A possible December rate hike now rests largely on whether the October readings of retail sales and the CPI are both strong as well – readings of around 0.3% m-o-m and 5.0% y-o-y respectively or higher.
Essentially, the reports covering the October labour force and the Q3 wage price index indicate that the RBA is under-reading the strength of the labour market in its latest economic forecasts published just two weeks ago. In those forecasts the RBA had the unemployment rate rising to 3.8% in December 2023, with employment up 2.5% y-o-y and the wage price index up 4.0% y-o-y.
In October, total employment rose by 55,000 and was up by 3.0% y-o-y. For employment growth to get to the RBA’s latest forecast of 2.5% y-o-y in December, total employment would need to fall 20,000 over November and December, not impossible but very unlikely. A more likely outlook is that total employment grows much less strongly than in October, but still grows around 20,000 average per month. That would leave annual growth in employment at 2.9% y-o-y in December, well above the RBA’s latest forecast.
The RBA stands more chance of hitting its latest forecast 3.8% unemployment rate in the December quarter although it will need the unemployment rate to lift to 3.8% in both November and December. In October, the unemployment rate rose one notch to 3.7%. The unemployment rate has been travelling within a low and narrow range of between 3.5% and 3.7% through the first ten months of 2023. The consistent range this year is one factor that militates against an upside break of the range in November and December.
Also, the unemployment rate only hit the upper end of the range when the labour force participation rate was exceptionally high as was the case in October when the participation rate lifted to a record high 67.0% from 66.8%. A lift in the participation rate to a record high is a mark of confidence that the labour market is strong. It says that people feel confident that they can apply for jobs with reasonable hope of being successful.
Usually after the participation rate hits a high point it settles back for a month or so after. That settling back in the participation rate means that employment growth does not need to be strong to keep the unemployment rate steady or for it to fall. After the record high participation rate reading in October, some settling back in the rate is likely which also makes it unlikely that the unemployment rate will rise to the extent necessary for the RBA’s forecast 3.8% in the December quarter.
The lift in the Q3 wage price index by 1.3% q-o-q, 4.0% y-o-y means that the wage price index can lift by no more than 0.8% q-o-q in Q4 for the RBA’s latest 4.0% y-o-y wage forecast for December 2023. Given several big wage negotiations being agreed in the current quarter, a Q4 wage price index rise of at least 1.0% q-o-q is likely lifting wages by at least 4.2% y-o-y.
The likely upward revisions to employment growth and wage growth that the RBA may need to make in its next Monetary Policy Statement (in February 2024) are also likely to underpin upward revisions to household consumption spending, GDP growth and inflation.
The RBA may get some leeway if the October retail sales and CPI reports are sufficiently soft to wait for the November and December labour force reports (out in mid-December and mid-January) before deciding whether to hike rates again. However, after the strong labour force and wage reports last week, it will find it hard not to hike the cash rate in December if the October retail sales and CPI reports add fuel to the need to revise upwards its latest growth and inflation forecasts.
Australia is showing signs of both more resilient economic growth and higher inflation than in other major developed economies. The strength of the Australian housing market in the face of higher mortgage interest rates, the tightness of the labour market lifting wages and allowing people to work more hours and more jobs if they wish and embedded high government spending are all factors working towards underpinning demand and making the slowing of demand needed to batten down inflation less pronounced and more protracted than widely forecast, including by the RBA.
The RBA almost certainly needs to hike the cash rate further and in the near-term the only issue is whether it can wait until February before making the next move. We are watching the retail sales and inflation reports out next week to decide that call.