Labour market continues to worry RBA
While unemployment has been creeping higher in recent months, it is the other u word – underemployment – that is becoming an increasing focus for the RBA. The rise in the indicator, which better reflects the composition of unemployment, featured again as a key concern for the central bank in their May Meeting Minutes released yesterday.
The details reflected discussions surrounding the “implications of the secular upward trend in the share of part-time employment”. Further, Board members highlighted the significant difficulty in assessing output lost in the economy from those willing to work full-time, but can only find part-time employment.
While the current unemployment rate of 5.9% is still below its recent peak of 6.3% reached in July 2015, its underemployment counterpart is sitting at its highest level on record at 8.7%. The latter has also exhibited a strong relationship with the RBA cash rate as shown below. As implied, this would suggest a continued deterioration may warrant additional cuts to the cash rate.
Keeping our focus on the labour market, the other key concern for the RBA remains the sluggish pace of wage growth. As illustrated below, the measure sunk to a record low 1.9% in the fourth quarter of 2016. This has been particularly worrying against a backdrop of increasingly leveraged households (yes, also at a record) as eager property buyers gear up.
The financial stability risks posed by the above were partly behind the wave of recent macro-prudential measures, which were effectively aimed at cooling the heels of overeager borrowers. As these begin to take the heat out of the market, the building boom experienced in recent years will likely fade further (see below). In turn, the economy will likely lose a reasonable growth driver over the coming year.
In combination with the lacklustre Federal Budget handed down last week, there is a large question mark over what will fill a growing hole and alleviate the RBA’s labour market worries. This should see 2018 as a tell-tale year. Meanwhile, the remainder of 2017 will likely see increasing speculation over which policy direction Governor Lowe will lean. Given the deteriorating labour market trends and headwinds facing the housing market our bias remains towards a cut.