Daily Commentary BY THE CURVE TEAM –

Employment Data Complicates Outlook

25th of January, 2019

The latest update on Australia’s employment will certainly make for an interesting conversation at the RBA when they next meet in 11 days time.

Australia’s employment market remained sound going into the end of 2018 with little signs of the slowdown in the pace of economy growth effecting jobs growth yet. The economy added a further 21,600 jobs in December. The unemployment rate dipped 0.1% after the participation rate also eased 0.1%. Importantly the underemployment rate remained elevated at 8.4%.

The employment data created somewhat of a conundrum for the RBA when they convene for their first meeting of the year in 11 days and update their forecasts.

In aggregate, the data since the RBA’s last meeting in December has been softer than they would have been expected. The GDP data alone means that they will have to downgrade their starting point for their growth forecasts. With employment data remaining strong, they may be reluctant to downgrade the outlook further out.

But it isn’t just the domestic backdrop that they need to be concerned about.

Offshore the data has been softer and the global economy has shifted down a gear recently. China has been front and centre of the headlines around the global slowdown but they aren’t on their own. Export from most of Asia’s key economies have collapsed over the past couple of months as well.

Data overnight confirms that Europe is also in trouble. The latest flash PMI’s for the region were softer again and their main growth engine, Germany, is spluttering. There is a growing probability that Germany and the broader Eurozone dipped into a technical recession in the fourth quarter.

As a result we could see the ECB start easing again after finally calling time on the Quantitative Easing program at the end of 2018. Appearing at a press conference following the latest ECB meeting, President Mario Draghi basically said the ECB stands ready to do whatever it takes once again if required.

So it appears that even if the RBA is reluctant to tinker too much with their growth forecasts this time around, when the next update of their forecasts come in May, it could be a very different story. As for their inflation forecasts, much will hinge on next weeks update on consumer prices for the fourth quarter.

David Flanagan

Director - Interest Rate Markets