Australian Jobs Surge, Unemployment at 32-Year Low
Australian employment surged in April, driving the jobless rate to a 32-year trough and stoking concerns a super-tight labor market would eventually threaten higher inflation and interest rates.
The Australian dollar jumped a quarter of a U.S. cent while bond and bill futures slide as the market priced in a greater risk of another rise in interest rates later in the year.
Government figures on Thursday showed employment jumped 49,600 in April, way above forecasts of a 10,000 gain. The jobless rate unexpectedly dropped to 4.4% from 4.5% in March to the lowest reading since November 1974.
"We seem to have hit this economic sweet spot in the sense of low unemployment and not much to speak of in terms of wage and price pressures," said Michael Blythe, chief economist at Commonwealth Bank.
Just last week, the Reserve Bank of Australia (RBA) acknowledged that inflation had slowed by more than expected and cut its forecast for underlying inflation in 2007 to 2.5%, bang in the middle of its 2% to 3% target.
Yet always the suspicion was that such good fortune could not last.
"The Reserve Bank is concerned about tight labor markets and that is one of the reason why they have a tightening bias in place. Today's numbers are only going to reinforce that bias," added CBA's Blythe.
Central Bank Warning
The central bank has been at pains to warn that inflation was unlikely to stay so low given the lack of spare capacity in the economy, a drum-tight labor market and strong domestic demand.
Indeed, figures out this week showed retail sales surged in the first quarter of the year, setting the whole economy up for vigorous growth of at least 1.0% in the quarter.
"This is monstrously huge," said TD Securities senior economist Joshua Williamson in reaction to the jobs report. "This is an expansionary economy, and if you couple this with a pro-cyclical
budget, we would not be surprised to see the tightening bias to be re-emphasized in coming months," he added.
Earlier this week, the Liberal-National coalition government unveiled a 2007/08 budget laden with tax breaks and new spending aimed at securing votes ahead of a tough election later in the year.
Still, so far wages have remained remarkably restrained despite 16 years of ceaseless economic growth and a remorseless decline in the jobless rate to generational lows.
The government's main indicator of wage costs is running at around 4.0% a year, below the 4.5% barrier that analysts consider a risk to inflation.
The wage price index for the first quarter is due out next week and analysts suspect it could well show some acceleration in growth. However, the RBA itself has cautioned that any pick-up in wages could be due to a change in the timing of a minimum national wage award.
"This figure will be boosted by the particular timing of the minimum wage decision, and is therefore likely to overstate the level of underlying wage increases for that quarter," the RBA said in last week's quarterly Statement on Monetary Policy.
The restraint in wages owes much to an increase in the supply of workers, both through policies encouraging women and the formerly retired into the workplace and through immigration, which the government has just lifted to over 150,000 a year.