Last week, we wrote about how monetary conditions in Australia could tighten through a combination of potentially rising bank lending interest rates over the next few months and a stronger Australian dollar exchange rate. A key factor in this assessment is that the RBA leaves its cash rate unchanged at its next policy meeting on 1st November as it seems to be strongly hinting in various recent speeches by senior RBA officials. A decision not to cut its cash rate may seem reasonable on the basis of mostly firmer recent economic readings although one indicator, employment growth, is flashing a warning signal that the economy may not continue to perform as well as it has been.
While Australia’s unemployment rate stayed at 5.6% in October around the lowest reading in nearly four years, it is only holding down because of weakening labour force participation rate (the proportion of the population of working age, either in work or seeking work) a sign of underlying weakness in labour market conditions.
That sign of weakness in labour market conditions, particularly how much conditions have softened over the past year or so, is evident in weak employment growth so far this year. We have taken the monthly employment data and aggregated for three-month or quarterly change to take out some of the volatility in monthly employment changes. This puts a slightly better gloss on the two most recent monthly employment readings for September and August showing back-to-back falls respectively of 9,800 and 8,600 which when the July rise of 26,300 is added gives an increase in employment for the three-months ending September 2016 of 7,900.
That rise in total employment of 7,900 compares with increases of 28,500 for the three months ending June 2016 and 14,300 for the three months ending March. It is clear that total employment growth has been weakest in the most recent three month period for 2016 so far. Moreover, all three quarterly increases in employment so far in 2016 are considerably lower than the final two quarterly employment increases for 2015, 112,500 in Q4 and 79,200 in Q3.
The difference between total employment growth in the final two quarters of 2015, +182,600, and the first three quarters of 2016, +50,700 points to substantial loss of momentum in total employment growth this year so far. Splitting total employment growth in to full-time and part-time employment reveals that the change between second half of 2015 and the first three quarters of 2016 is even weaker than revealed in the total employment changes. In the second half of 2015, full-time employment rose by 113,600 while part-time rose by 69,000. In the first three quarters of 2016 full-time employment fell by 112,100 while part-time rose by 206,600.
A longer-term trend towards more part-time employment in the economy rather than full-time employment has become particularly pronounced in 2016. This could be a matter of the preferences of those joining the work force , but it could also be a matter of employers continuing to seek ways of saving labour costs and preferring a bigger proportion of part-time as opposed to full-time employees.
Two measures that point to the shift towards part-time being more a matter of employer cost saving rather than employee preference are paid hours worked and the underemployment rate (those who would like to work more hours if available). So far in 2016 there has been almost no growth in paid hours worked (less than 0.1% growth since December 2015). The underemployment rate has risen from 8.4% to 8.7% over the same period.
Even though Australia’s GDP growth rate looks reasonably strong at 3.3% y-o-y in Q2 2015, that has not been strong enough to maintain reasonable momentum in total employment growth. Indeed, there is plenty of evidence that employment growth has lost momentum even if that deterioration is not yet evident in a turn upwards in the unemployment rate. Unless there is a marked turn for the stronger in employment growth in coming months, it will not be long before the unemployment rate starts to rise and annual GDP growth fades. This is not the time that Australia needs monetary conditions to tighten, but that may happen, albeit unintentionally, if the RBA leaves its cash rate unchanged next week.