Daily Commentary BY THE CURVE TEAM –

Jobs Recovery Complete

19th of March, 2021

The employment markets remarkable recovery defies expectations.

Yet again, employment numbers overdelivered, with 89 000 jobs gained over February. More people are employed than this time last year, to completely recover the jobs lost during covid. Significantly, full time employment is higher than this time last year, so the recovery has not been dominated by part time employment.

The unemployment rate is now 5.8% and the participation rate remained at 66.1%. The RBA’s latest forecasts had unemployment at 6% by December 2021, so the lift in jobs is well ahead of RBA expectations.

This may well have ramifications for whether the RBA extends Yield Curve Control and QE. Two key variables will be whether the lift in employment translates to wage growth, and the Fed’s policy.

On the former, the RBA have made it clear wages growth is the key to determining their policy. Until wages lift, they will be reluctant to tighten policy too quickly because they view this as the sustainable path to inflation and economic activity. If there are lifts in inflation over the next year, the RBA will likely view these as transient.

The Fed’s policy will take on more significance with expectations of inflation lifting sharply in the US relative to other countries. Should these eventuate and the Fed tightens policy before 2024, then there will be less need for the RBA to keep policy loose, so the Australian Dollar does not go too high.

Headwinds remain for the employment outlook. We are yet to see what effect the end of JobKeeper will have and underemployment rose 0.4% points to 8.5%, which could signal people are taking on jobs they are overqualified for given hours worked soared 6.1% over February.

However, a case is mounting for a continued strong recovery. The RBA earlier in the week indicated that most employers using JobKeeper had let go many employees and the pace of new jobs should offset any losses. Further, with immigration limited over the near term there will be more competition for employees, which has led to speculation the NAIRU (the unemployment rate where inflation and wage growth rises) may be higher than pre covid.

Josh Stewart

Associate - Money Markets