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Thursday, June 7, 2012
Economist reactions to Australia's above-trend economy
Another positive surprise for Australian economic data. Employment rose 38,900 in May, with a gain of 46,100 in full-time jobs, and there have now been 86,500 jobs created since February 2012. The employment data bring some credibility to the GDP data released yesterday which showed very strong growth in Q1, and certainly ease the pressure on the RBA to cut interest rates again in July.
Jobs – it’s a boom (…just like GDP)! The labour market has clearly turned up...This is the first 3-month jobs gain in over a year, lifting the y/y pace to 1.0%, up from 0.0% at the end of last year. Over the past 3 months, jobs have averaged +29k pm (a circa 3% annualised pace), after ‘flat’ in the prior 3 months.
We flagged the rise that the consecutive gains in jobs last month was signalling a strengthening in the jobs market. Today’s data makes that unequivocal. While the unemployment rate has flitted between 5.0-5.2% for much of the past 2 years, we now have a clear improving trend in jobs and hours-worked, led in particular by full-time positions. In addition, jobs have recently picked-up most across NSW and VIC.
For the economy, and the consumer particularly, recent rate cuts and Federal budget family cash hand-outs, paint a solidly improving trend for household disposable income growth...For the RBA, a relatively steady unemployment rate, and pick-up in jobs growth, add to the message from yesterday’s GDP data that the economy is doing much better than most had thought, and sees the RBA benched as far as further cuts are concerned, at least until the next CPI print, and absent a crisis on the global front.
Bet against the Aussie labour data at your peril. Labour market maintains sticky unemployment rate in the low 5s, absorbing a large rise in participation. As we have repeatedly emphasized, the employment growth numbers are not to be interpreted as ‘net hiring’, but the magnitude of the rise nevertheless confirms that most new labour entrants found jobs in May. Recent domestic data have underscored resilience of the economy leading into global growth wobbles.
The Australian labour force survey for May provided yet further evidence that perpetually downbeat sentiment is far from a sufficient condition for macro weakness. The unemployment rate had looked a little too low in April, but following an upward revision, the move in May looks very marginal, up just a tenth to 5.1%, maintaining the even keel of the last nine months despite very downbeat reads on both consumer and business confidence.
The title of the speech to be delivered by RBA Governor Stevens tomorrow is “The Glass Half Full”. Given that the data this week have shown growth well above trend in 1Q, and the labour market still steaming along in 2Q, Stevens now is inclined to think his cup runneth over...
Nevertheless, this week’s news will make the more data-biased members of the RBA Board a little nervous about the stimulus already delivered. It seems likely that the unemployment rate will rise further, but unless one thinks the RBA’s conventional weapons will be tapped out, the starting point for the domestic data matters, even in the face of Europe’s strife. In the absence of near-term calamity, this week’s data should therefore see the RBA even more focused than usual on the quarterly inflation report, which leaves us comfortable that only further evidence of weakness in prices will allow further easing. We forecast the next easing of policy to occur in August.
The labour force increased by a very strong 61k in May, the largest monthly gain in over three years. The boost to the participation rate is a sign that people are becoming confident about job prospects and re-entering the labour force. On our estimate, the labour force gain was three times the size of the gain in the working age population (Figure 6). Note that if the participation rate had remained unchanged, the unemployment rate would have fallen to 4.7%. Coming on the back of the RBA’s renewed policy easing, such a dip in the unemployment rate could have been a concern for wage based inflation.
Like yesterday’s GDP report, the quality of today’s labour market report is high. Both employment and labour force participation continued to build on the recovery (Figure 7) that has been evident for some time. Consistent with the dual recovery in employment and the labour force, the unemployment rate has been steady in the low 5% range for over a year despite fears about job losses in a number of industries. This is consistent with the flat trend in unemployment benefit recipients (Newstart) and is in sharp contrast to the pessimistic perception of the labour market amongst households (Figure 3). The economy actually is doing reasonably well but the “feel good”factor is missing, presumably because of the massive structural change in the economy and the bad news out of Europe.
The labour force data does not support more easing by the RBA. The RBA’s reaction function appears strongly driven by the unemployment rate (Figure 5). Without global events and the downside risks they pose, domestic data over the past two days would not suggest that the RBA would have taken official interest rates to 3.50%. However, the RBA’s reaction function has become more sensitive to global events given the potential to adversely effect economic activity more broadly. For as long as the European debt crisis remains, the risk weighted bias should be towards lower interest rates, but we do not expect the large cuts expected by the market to be delivered when the economy is so far above stall speed.
While there are no data yet on which industries are creating the jobs, the states making the largest contributions to employment growth this month were NSW and Victoria. Hours worked data by state are noisy but it also appears that this too shows a recovery in these two big states (Figure 4). In contrast, Queensland continues to underperform, still weighed down by weakness in housing and tourism. The rate cuts should therefore help.