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Australia’s sharp fall in employment likely to cause concern for the RBA, jobless rate to rise further: Capital Economics

Australia’s sharp fall in employment likely to cause concern for the Reserve Bank of Australia (RBA) and the unemployment rate is further expected to rise in the coming months, according to the latest research report from Capital Economics.

The sharp 19,000 fall in employment in October was the largest decline in three years and well below the Bloomberg median forecast of a rise of 15,000. Annual employment growth eased from 2.5 percent in September to 2.0 percent in October.

The unemployment rate bounced back from 5.2 percent to 5.3 percent and the only reason why it didn’t rise even more was that the participation rate fell for the second consecutive month. The participation rate is more likely to rise in coming months adding further upward pressure on the unemployment rate.

The composition of the employment decline showed a 10,300 fall in full-time employment and an 8,700 decline for part-time employment. That meant that the underutilisation rate rose to 13.8 percent in October from 13.5 percent.

"We expect that increase in spare capacity to result in wage growth falling from 2.2 percent y/y in Q3 to 2.0 percent in 2020," the report added.

Admittedly, employment surveys point to jobs growth picking back up to around 2.5 percent y/y in 2020. But the declines in job vacancies suggest that employment growth may slow to close to 1 percent which would be in line with the current weakness in economic activity.

And while job advertisements haven’t fallen much further in recent months, they still point to an unemployment rate of around 5.5 percent. So do households’ unemployment expectations.

"We reiterate our forecast that the unemployment rate will climb to 5.5 percent by early next year which should force the RBA to cut rates to 0.5 percent in February. And given our expectation that weaker wage growth will result in inflation falling further below the RBA’s target, we don’t think the Bank will stop there," Capital Economics further commented in the report.

By Debarati Bir
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