The Australian jobs market continues to roar back to strength, with employment now back above pre-pandemic levels, raising the chance that interest rates could begin to rise again by late 2022 – more than a full year ahead of the Reserve Bank of Australia’s current “2024 at the earliest” position1.
Employment is now 8.1% higher than its COVID low point in May last year, and unemployment at 5.1%– down from 5.5% in April – is also back to where it was in February 2020 before the pandemic2.
AMP Capital continues to expect the first interest rate hike to occur in 2023, but after these strong jobs numbers there is a risk that late 2022 could be the launch pad for rate tightening by the RBA, assuming there is no major upset from coronavirus.
The path towards full employment
It is not simply that the labour force numbers have clawed back to pre-COVID levels and better, but the clear signs of further improvement to come that add weight to the growing sense the RBA may not wait until 2024.
The compositional mix in the jobs market data was particularly strong, with full-time jobs up by 97,500 in a month and labour force participation rate at a strong 66.2% – also above its pre-coronavirus level.
The number of people working fewer hours for economic reasons is back to early 2020 levels, suggesting that there may be little in the way of JobKeeper-related layoffs to come. Total hours worked rose by 1.4% in May and that is up 13% on a year ago.
The ratio of employment to population in Australia rose to 62.8%, which is a record high.
Unemployment is likely to be just below 5.0% by the end of 2021 and indicators are that we still have a fair way to go for the Australian economy to get to full employment. Likewise, there is a way to go to meet the RBA’s condition that wages growth be “sustainably above 3.0%”3 before monetary policy will be tightened.
The recent 2.5% increase to the minimum wage – compared to 1.8% a year ago – will only boost overall wage growth by 0.15%.
Flow-on effects of a roaring jobs market
Progress towards full employment is happening much faster than the RBA has been allowing for. Job vacancies are at near record levels, job advertisements are strong, as are business hiring plans.
The strong jobs market is having other effects, including on the RBA’s bond buying program. We expect the central bank to announce next month that it will stick with the April 2024 bond for its three-year bond yield target, and that it will slow and/or more frequently review its weekly bond buying from September.
We expect the exit path for the RBA from accommodative monetary policy to look like this: ending the Term Funding Facility for banks in June; leaving the bond yield target focused on the April 2024 bond; tapering the bond buying program from September; and possibly ending the bond yield target next year ahead of a first rate hike in 2023 (or possibly late 2022 as discussed above, coronavirus permitting).
The shift towards tapering and a pull forward in the first rate hike may cause bouts of nervousness in markets, with shares vulnerable to a decent correction. But note that tapering is not monetary tightening (it’s just slower easing) and rate hikes are still a fair way off in most developed countries. It’s also worth noting that during the last US taper from December 2013 to October 2014, shares actually rose.
Risks remain while COVID-19 exists
The main risk to the improving jobs picture is the negative impact of continued COVID-19 scares, especially from more contagious strains like the Delta variant, and further lockdowns. At the time of writing, Sydney and parts of NSW have entered a 14-day lockdown.
If the snap lockdown is kept short, as was that in Victoria from late May, then we expect the impact on longer-term job numbers, as well as the encouraging economic outlook, to be minimal.
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