Aussie jobs data disappoint

Underutilisation is a broader measure of spare capacity than the unemployment rate, including those unemployed and underemployed, and this remained at 13.7%. Underemployment (those employed but wanting to and available to work more hours), another measure of labour market slack, also rose from 8.5% to 8.6% in May, meaning more than one million people in Australia have work but want to work more hours. Almost 30% of 15–24 year old’s are underutilised at present, evident of a colossal policy failure by federal and state government.

Combine stagnant wage growth, labour market slack and an economy heavily reliant on private consumption and you have an ugly cocktail for sub-trend economic growth and underwhelming activity. Get ready for more rate cuts!

Given that the RBA’s focus has shifted to the labour market, yesterday's data was keenly watched. But a more important development this week was actually on Wednesday evening, when RBA assistant governor Luci Ellis whilst delivering a speech in Melbourne gave a significant update on the RBA’s outlook for the labour market. Ellis outlined that the RBA now estimatse the “non-accelerating inflation rate of unemployment” (NAIRU), which refers to a theoretical level of unemployment below which inflation would be expected to pick up, is now around 4.5% and could be lower. This highlights that the RBA is woefully behind the curve, something we have previously bemoaned, and will have to move to aggressively cut policy rates. Something that Ellis confirmed when she went on to say, “If Australia truly can have lower unemployment – sustainably – policy should be used to try to get there.”

Reading between the lines, this raises the prospect of further rate cuts. The RBA forecasts of a 5% unemployment rate in the May Statement of Monetary Policy are predicated upon two rate cuts and if unemployment now needs to fall below 4.5% in order to spur inflation further rate cuts will be inevitable. For those thinking the RBA will stop at 1%, think again. In this environment, as the domestic outlook remains dim and rates head to new record lows AUD downside will prevail.

Given that RBA’s communication strategy appears to be shifting with the outlook for policy being much more clearly articulated to market participants in speeches as opposed to post-meeting statements, Governor Lowe’s speech on Thursday next week on The Labour Market and Spare Capacity will likely be a key indicator of whether the RBA will follow up with a second rate cut in July or August and how aggressively the central bank will move to meet their targets.