Australia: Unemployment rate to continue to drift lower before wages growth picks up – NAB

The Australian labour market continued to improve strongly, with the latest ABS figures showing employment grew by 3.7k in October (in seasonally adjusted terms) and while the gain was smaller than the market expected, it came after a period of strong jobs growth and marked the 13th month of consecutive increase, and a rise of 15K is forecast for November (Mkt: +19K), explains the research team at NAB.

Key Quotes

“The participation rate declined by 0.1 ppt to 65.1% in October, driving the unemployment rate down further to 5.4%. It was the first time the participation rate fell this year, as the overall stronger labour demand has been met with increased labour market participation, especially among older workers and women. We forecast the unemployment rate to continue to drift lower as the labour market improves further, to around 5.2% by the end of 2018. How rapidly the unemployment rate might decline is dependent on the participation rate.”

“Employment grew the strongest in Queensland in October, after declining last month, while other states showed some weakness. Victoria lost 14.5k jobs, possibly related to the car manufacturing closure, which also saw a decline in its participation rate. Over the year, Victoria still recorded strong employment growth. In trend terms, all states and territories recorded positive employment growth except for Tasmania and the Northern Territory.”

“Forward indicators continue to suggest the labour market will tighten further. The NAB Business Survey is consistent with employment growth of around 20k a month – similar to the current trend jobs growth– and is importantly above the +14.4k breakeven level needed to keep the unemployment rate steady.”

“Wages growth rose 0.5% q/q and 2.0% y/y in Q3, below market expectations and failed to show a noticeable lift as a result of the increase in the minimum wage. While it seemed the minimum wage increase did drive wages growth in one-third of the industries, the other two thirds did not show much flow-on effect. Wages growth in WA also lagged behind, but it is hoped as the drag from the mining downturn has largely passed, wages growth might start improving.”

“The Q3 National Accounts also showed weak labour earnings growth, with average labour earnings increasing by only 0.3% in the quarter and 0.6% over the year. The NAB survey showed labour costs growth rebounded somewhat in November, to 1.2% (a quarterly rate, previously 0.8%). Labour cost inflation has been subdued but trending higher. Wage pressures are strongest in mining, but softest in construction.”

“While still elevated at 8.6%, the latest measure of the underemployment rate had declined from recent highs and is expected to decline further as labour market spare capacity is gradually eliminated. Overall we expect to see some lift in wages growth as a result of the strong labour market improvement.”