Australia Jobs Surge Again, Unemployment at New Low
Australian employment surged way past all expectations for a second straight month in May, driving the jobless rate to 33-year lows and fuelling concerns the drum-tight labor market would eventually stoke inflation.
The Australian dollar jumped to a 17-year high while bond and bill futures sank as the market priced in a greater risk of another rise in interest rates, perhaps as soon as July.
"It's exceptionally strong and very substantially increases the likelihood of a rate hike in July," said John Edwards, chief economist at HSBC. "In the eyes of the Reserve Bank (RBA) it will increase the risk of some acceleration in wages growth and that will be an argument for a tightening in July," he added.
Thursday's data showed employment jumped 39,400 in May, far above forecasts of a 10,000 gain and came on top of a revised 34,900 increase in April. Adding to the heat, full-time employment soared by 66,800.
The jobless rate unexpectedly dropped to 4.2%, from 4.4% in April, the lowest reading since November 1974.
"It's simply extraordinary how strong the labor market is," said Brian Redican, a senior economist at Macquarie Bank. "This result must shorten the odds of a hike."
"We know the Reserve Bank is very sensitive to the unemployment rate, so this latest drop will make them sit up and take notice," he added.
Interest rate futures now imply a 44% chance of a quarter-percentage point rate rise to 6.5% at the RBA's next policy meeting on July 3. And the tightening might not stop there, with the market pricing in 49 basis points of hikes in the next twelve months.
Waiting On Wages
The jobs news was just the latest in a string of strong economic reports on retail and vehicle sales, housing, consumer confidence, credit growth, construction and business investment.
Figures out Wednesday showed the economy grew at a breakneck 1.6% pace in the first quarter, well above forecasts and the fastest clip in over three years.
The gross domestic product (GDP) numbers also provided an insight into why firms were still so hungry for labor.
The share of business profits as a proportion of GDP climbed to 28.1%, the highest level since 1979, leaving the wages share to fall to 53.2%.
"The shift in the GDP shares may help explain the strength of the jobs market from an employers' cost viewpoint," said Michael Blythe, chief economist at Commonwealth Bank. "Relative labor costs are falling."
Real unit labor costs fell by 1.4% in the first quarter, to be 2.1% lower over the year, while profit growth far outstripped nominal growth in wages.
Indeed, wages have been remarkably restrained by historical standards. While booming sectors like mining and construction have been gaining awards above 6% with bonuses, much of the broader economy, and particularly the fiercely-competitive retail sector, was seeing pay gains of 4% or less.
The government's main indicator of wage costs is running at around 4.1% a year, below the 4.5% barrier that analysts consider a risk to inflation.
This restraint owes much to an increase in the supply of workers, both through policies encouraging women and the retired into the workplace and through record immigration. The government has just lifted its immigration quota to 150,000 a year, with much of that aimed at skilled workers.