Watch For A Sub-5% Jobless Rate In Australia
By JAMES GLYNN
Of DOW JONES NEWSWIRES
SYDNEY -- Australia's labor market is strong and a wage-driven inflation spike may not be far off. For the central bank, the key is likely to be if the unemployment rate drops under 5%.
Spare capacity in the economy is being devoured quickly with close to 200,000 jobs created since August, pulling the unemployment rate down from 5.8% in October to 5.3% in January, its lowest level in almost 12 months.
The jobs surge bolsters the case for a resumption of rate hikes in March, after the Reserve Bank of Australia paused in February. It has more than justified the three RBA rate hikes in late 2009.
The final run of data before the RBA's next policy meeting on March 2 still needs to be looked at before a further hike can be signed off on, particularly January retail sales after a patchy Christmas sales period.
But while it's difficult to pinpoint a precise level of unemployment that will ignite inflation, it is likely policy makers believe a drop below 5% in the last cycle invited a wages push.
Unemployment fell to 4.9% in March 2006, with core inflation rising sharply over ensuing years from around 3% to a peak of 4.8% in the third quarter of 2008. The RBA hiked rates seven times through that period.
It is reasonable to think a similar dynamic will play out this time around--the various economic metrics for the current cycle wouldn't warrant too different a plan of attack--and the current pace of job creation means the threshold will be breached soon.
The labor market participation rate has stayed high, suggesting optimism among jobseekers that work can be found, while unions are talking more confidently about substantial wage claims.
The economy is also on the cusp of a renewed terms of trade boom, while a construction upswing will give it extra pep in 2010.
Some economists will likely point to a 1% fall in total hours worked in the economy in January as a weak point. But policy makers are likely evaluating the usefulness of that data series, which is still extremely young (it was introduced in August 2009).
Stepping back and looking at the numbers, it is the surge in employment and the drop in unemployment that is most telling. If the job market remains buoyant and the RBA keeps rates steady in coming months, the risk of it falling behind the policy curve will rise.
There is the argument that the employment surge overstates the underlying strength of the economy. To drive the jobs growth seen since August, some models suggest economic growth needed to have been a lot stronger than it currently looks.
That view may be put to rest in the normal run of quarterly national accounts data, with the next batch due March 3. If the economy has a habit of doing anything, it is of surprising on the upside against consensus forecasts. |
