Australia jobs rebound leaves RBA outlook uncertain

CreditorWatch said Australia's labour market recovered in May after a weak April reading, though the rebound still left the interest rate outlook uncertain, according to Chief Economist Ivan Colhoun.

Employment rose by 40,300 in May, Colhoun said, but a large downward revision to April left little net growth across the two months. April employment was revised to a fall of 40,700, a downgrade of 32,000 from the original estimate.

The unemployment rate edged down to 4.4% from 4.5%, but remained above the Reserve Bank of Australia's forecast of 4.2% for the quarter.

Colhoun said the latest labour force figures were in line with expectations after distortions caused by April public holiday timing eased. He also pointed to survey changes as a possible reason for the unusually large revision.

The Australian Bureau of Statistics said fewer unemployed people were waiting to start jobs. That contributed to both the increase in employment and an 18,000 fall in the number of unemployed people.

"Over the past few months, we have recorded higher proportions of unemployed people waiting to start jobs who then remained unemployed in the following month. The backlog of people waiting to start a job has eased in May, contributing to the 40,000 rise in employment and 18,000 fall in unemployed persons," the Statistician said.

Colhoun said the pattern may indicate employers delayed hiring amid uncertainty linked to higher fuel prices and conflict in the Middle East during March and April. Those concerns did not appear to persist into May, he said.

Mixed signals

Despite the rebound, several labour market indicators remain under watch. The underemployment rate rose 0.1 percentage point in May, although it has been broadly flat over the past 18 months.

Youth unemployment, which tends to react quickly to shifts in labour market conditions, has also been trending higher over time, though it fell in May. Colhoun said that pointed to some easing in conditions, even if monthly readings remain volatile.

At the state level, the data pointed to rising unemployment trends in three of the four largest states, with Queensland moving in the opposite direction, Colhoun said. He also said recent employment data from New South Wales looked questionable and should be treated cautiously, while Victoria's higher unemployment rate was the clearest sustained state-based signal.

Other indicators released at the same time painted a similar picture. Job vacancies fell 2.1% over the three months to May, but Colhoun said the series had largely moved sideways for much of the past 18 months and did not point to a sharp rise in unemployment.

He placed more emphasis on SEEK job ads, which fell 2.3% in May and have weakened in recent months. The series is more timely and has historically tracked trends in unemployment and interest rates closely.

"At face value, the bounce back in the employment and household spending data after weak April readings is welcome news for the economy, and should have seen interest rate markets worry a little more about the prospect of some further interest rate tightening in the medium term, especially after the Statistician noted stronger price rises in some components of household spending. However, there are also a lot of developments globally that are likely overwhelming the message of today's data for the economy and interest rate markets. The seeming end to the Middle East conflict and continuing decline in oil prices is growth supportive and should mostly reverse recent price pressures in time, while the correction in AI stocks is less favourable for growth as is a likely modest tightening of US monetary policy in the months ahead. The sum of these developments should allow the RBA to continue to observe the economy and inflation for some months, but it remains premature to rule out the risk of some further tightening in Australia, though the beginning of a slight decline in job ads and rise in unemployment are signs that must be monitored closely in the months ahead given their strong relationships with unemployment and interest rates," said Ivan Colhoun, Chief Economist, CreditorWatch.

Spending rebound

Household spending also recovered in May, reversing April's decline. Spending rose 1.3% month on month after a 1.1% fall in the previous month.

Transport spending increased 1.4% as refunds linked to cancelled Middle East travel eased, while fuel sales declined. Colhoun said a measure excluding transport and food, the categories most affected by the regional conflict, also rose 1.3%.

The rebound in activity was not without inflation concerns. Colhoun highlighted the Statistician's comments that higher prices had contributed to spending increases in areas including hotels, cafes, restaurants and food.

That leaves the policy picture finely balanced. Stronger spending and a recovery in employment reduce the case for an early easing in financial conditions, while softer job advertisements, higher youth unemployment over time and lower oil prices argue for patience from the central bank.

For now, Colhoun's view is that the Reserve Bank still has room to wait. But with unemployment above its own forecast and some labour indicators softening, the question of whether further tightening is needed has not gone away.