Australia’s Surprise Jump in Unemployment Boosts Pressure on RBA

Australian unemployment unexpectedly jumped as the economy shed jobs for a second straight month, in a sign the labor market is starting to weaken in response to the Reserve Bank’s aggressive tightening cycle.

(Bloomberg) — Australian unemployment unexpectedly jumped as the economy shed jobs for a second straight month, in a sign the labor market is starting to weaken in response to the Reserve Bank’s aggressive tightening cycle.

Government bond yields slid and stocks gained after data Thursday showed the jobless rate climbed to an eight-month high of 3.7% in January from 3.5%. Employers cut 11,000 roles and December’s loss was revised up to 20,000.

The result suggests the RBA will need to move cautiously on pulling the trigger for further interest-rate increases given its desire to bring the economy in for a soft landing. It also ratchets up pressure on Governor Philip Lowe ahead of his second sitting of testimony at Parliament House on Friday.

“Monthly data can move around a bit, but if you are uncertain about how things are evolving this is the kind of data that might make the RBA think about pausing,” said Gareth Aird, head of Australia economics at Commonwealth Bank of Australia. “The question is, is this a one-off or is it a turning point?”

Lowe is trying to hold onto employment gains after 3.25 percentage points of rate hikes since May and with more in the offing. The governor is likely to be probed by lawmakers tomorrow on his renewed hawkish pivot, the economic outlook and his performance in the top job.

Aird said the hearing takes on extra significance given Lowe will likely be asked for his reaction to today’s report. Labor market strength has been a key reason why the central bank believes Australia can avoid a recession even as borrowing costs are raised to pull down inflation. 

Some economists also point to a peak in job vacancies and expectations of faster population growth from overseas migration as reasons for a likely further slowdown in employment. 

What Bloomberg Economics Says…

“Given labor-supply increases, job growth will need to average 2.1% per year to stop the unemployment rate from rising further. This rapid pace equates to more than 24,000 jobs added per month — a high hurdle given our outlook for growth to slow in 2023 as rate hikes bite”

— James McIntyre, economist

The weak data highlights why Australia needs a “more nuanced approach” to fighting inflation “that avoids pushing more people onto woefully inadequate income support,” said Cassandra Goldie, head of ACOSS, the peak body for a range of groups that help impoverished and disadvantaged Australians.

“Now is the time for the RBA to pause on interest rate rises and take stock,” she said, urging government action over exorbitant rent and energy prices. 

Last week, the RBA raised its benchmark rate by a quarter-point to 3.35% and signaled more hikes are needed, surprising markets that had thought it may be approaching the end of the cycle.

Key to expectations of persistent labor market strength has been the high level of job vacancies, with the RBA forecasting unemployment will hold around 3.5%-3.6% through mid-2023.

That said, economic activity is seen weakening later in the year in response to the bank’s sharp tightening. There are signs in some areas of cooling already.

House prices are on a downward spiral, retail sales are slowing while data this week showed consumer sentiment plunged into deep pessimism.

Today’s result does support the RBA’s view that Australia is likely to avoid the price-wage spiral that has emerged in some other economies. Fourth-quarter wages data is due out on Wednesday.

Today’s jobs report also showed:

  • The participation rate edged lower to 66.5%.
  • Underemployment held at 6.1% and underutilization climbed to 9.8%
  • Full-time roles tumbled by 43,300, while part-time rose by 31,800
  • The employment to population ratio decreased to 64%

The data also showed 276,900 people were waiting to start work in January, the highest level in a year, implying the report may not be as weak as the headline numbers suggest.

“If that increase in people had been counted as being employed, jobs growth would have been well positive,” said Tapas Strickland, head of market economics at National Australia Bank Ltd. He expects the February employment report to be “very strong.”

–With assistance from Tomoko Sato and Garfield Reynolds.

(Adds commen from economist.)

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