Rise in jobless rate heightens rate cut expectations, but economists divided on employment prospects

The biggest quarterly drop in employment in decades has heightened expectations the Reserve Bank will push rates down rather than up.

Unemployment jumped to 5.1% in July, from four months at 4.9%, the Australian Bureau of Statistics said yesterday. The result is worse than economists had expected, and is the first rise in unemployment since last October.

ANZ economists Riki Polygenis and Ivan Colhoun say while the results won’t in themselves push the Reserve Bank to slice rates, a continuation of soft employment growth will prompt a rethink, given the central bank has been working under the assumption of stable growth over the near-term before falling in the medium-term.

“If current rates of employment growth are maintained, then the unemployment rate could rise to around 5.6% in six months’ time (assuming no change in the participation rate).”

“A weaker outcome (that is, a jump up to 5.3% in coming months), would significantly increase the chance that the next move in rates would be down and would help alleviate the RBA’s concerns about the medium-term inflation outlook.”

Harley Dale, chief economist of Housing Industry Association, said the figures matched anecdotal evidence of a weakening economy through June and July.

“It’s entirely possible we might be seeing some renewed softness in labour market through the second half of the year, but in fairness I don’t think we read too much into one month’s data.”

Dale said the HIA had had a view since late 2010 that unemployment would be steady throughout 2011.

“We need to keep in mind, relative to rest of world we have a very healthy labour market,” Dale says.

“And considering the recent growth forecast revisions from the RBA, 5-something is still a good rate, but not what they expecting at the start of the year.”

HSBC was more bullish, putting the increase in unemployment down to volatility rather than a start of a trend and pointing to high participation rates and forward-looking indicators of the labour market, such as job advertisements remaining at levels consistent with continued modest growth.

Noting that the central bank is between a rock and a hard place – that is, the mining boom and weak sentiment and equity markets – HSBC says expectations of large cuts are wide of the market and reiterates its forecast for an increase in rates.

“Last we heard from the RBA, they were forecasting underlying inflation to rise above their target band for the next two years. In our view, markets are either pricing a big global downturn that brings in inflation down or that the RBA gives up on its inflation targeting mandate, neither of which we think is likely,” HSBC chief economist and former RBA staffer Paul Bloxham said in a note.

“The recent global financial market developments will clearly sap further confidence from the Australian economy, particularly given the recent equity market falls and this will weaken the non-mining parts of the economy further – we have seen this in recent sentiment indicators.”

“But, as yet, there are no signs that the mining investment boom will not proceed, and given the high level of commodity prices and loose monetary policy settings in the developed world the risks must still be to the upside for inflation.”

“To cut rates, as the market is pricing, the RBA would have to be convinced that inflation will come down over the forecast horizon. This is a huge hurdle. The question of an intra-meeting cut, which has been bandied about, is also moot as this would be more destabilising than supportive.”

The ABS said the number of people remained relatively unchanged at 11.45 million, with a decrease in full-time employment (down 2,200 people) offset by an increase in part-time employment (up 22,100).

This means employment levels are about where they were in January, when the unemployment rate was 5% but the number of people stood at 11.44 million. The budget forecast employment to grow by 1.75%.

Goldman Sachs has also tipped two rate cuts by Christmas.

According to Westpac, while the leading indicators don’t point to a stalling in job creation, the data highlights a “softer and potentially worrying trend”.

“On current estimates, the Australia economy only has to create between 10k-12k jobs per month to hold the unemployment rate flat. Given the more conservative nature of business, and the negative shock to sentiment from recent global events, we expect to see the unemployment rate to drift higher from here,” Westpac senior economist Justin Smirk says.