Daily Commentary BY THE CURVE TEAM –

Employment The Glue Holding The Outlook Together

16th of November, 2018

The solid trend in Australia’s employment outcomes continue to be the glue holding the broader economic outlook together.

It was another month of strong employment growth for the Australia economy in October. Total jobs growth came in ahead of expectations at 32,800 comprising of a rise in full time employment of 42,300. The growth in new jobs was enough to keep the unemployment rate at 5%, even with a slight rise in the participation rate to 65.6.

The only hole you can poke in the numbers was that the underemployment rate remained sticky at 8.3%. That is the metric that needs to be watched closely as it is one of the best indicators of the slack in the labour force and has a strong inverse relationship with wage growth.

For now though, the employment market trend is the glue holding the economic outlook together. As long as employment growth holds up, it will go some way to assuaging fears of an economic collapse triggered by the fall in house prices.

The key for the outlook remains how the consumption/wage growth/savings rate equations balances itself out. The latest employment and wage data suggests that wage growth should continue to edge higher over the months ahead.

Over the past few years, it has been the falling savings rate that has been used to fill the gap between the growth rate in consumption and wage growth. The RBA’s outlook is based on the assumption that the pace of wage growth will increase towards 3% as the savings rate plateaus, keeping the growth rate of consumption stable.

There is a duel risk is that wages don’t pick up as fast as the RBA expects and that the savings rate actually rises as house prices fall which has been the case previously. How this equation evolves will influence the pace of consumption growth and with it shape the outlook for the economy and monetary policy.

David Flanagan

Director - Interest Rate Markets