- The Australian jobs market enjoyed gangbuster growth in 2017;
- More jobs are boosting consumer confidence;
- The RBA will be happy with how the economy is running;
- The CPI is the key domestic data to watch for rate changes this year.
“Too much of a good thing is wonderful”
Mae West was a US movie star who was particularly big in the 1920s-40s. By the standards of the time, she was known for being a little controversial. For example, she starred (as well as wrote, directed and produced) a Broadway play that ended up with her serving a short spell in jail. While not too many people these days will remember Mae West’s movies, a number of her quotes have stood the test of time.
When most people think about the economy, jobs is something where you can never have too much of a good thing. In 2017, creating employment was something at which the Australian economy excelled. Over 400,000 new jobs were created, close to a record number for a 12-month period. With the labour market booming workers are being attracted back into the labour market. The participation rate (the proportion of people or employed or actively looking for work) Australia-wide is near a record high.
The good news on jobs is likely to flow into 2018. The economy ended last year with good momentum, typically a sign that more jobs are on the way. This has been confirmed in surveys, with firms indicating that they intend to keep hiring. Job vacancy and ads data also point to a continued strong labour market. In addition to this, the extra jobs being created is boosting consumer confidence, reflecting in the substantial fall in their concerns about being unemployed.
But whilst 2017 was a good year for the labour market, the economy needs to run stronger for longer to create all the jobs that are still needed. The unemployment rate declined only modestly last year (a result of the large number of people that entered the labour force). Indeed, the unemployment rate is only around its average rate for the past ten years, and above the lows seen during the mining-boom and the pre-GFC salad days. The underemployment rate (the proportion of people working part-time that would like to work full-time) remains well above the levels of 1990-2010.
That there is still so many people looking for a full-time role is one reason why wages growth is moderate in most sectors of the economy. Providing the economy remains in decent shape this year (most analysts’ forecast), wages growth may rise a little over the course of this year. This is important as it is the negligible rise in workers’ disposable incomes (wages growth after taking out taxes, interest payments and non-discretionary spending) that is the major factor keeping consumers away from the shops.
Overall, the economy is performing at least as well as the RBA forecast; however, a stronger economy does not necessarily translate into an imminent rate rise. The level of the $A is doing some of the work of higher interest rates. And the cooling of the housing market (notably in Sydney) and the regulatory changes to mortgage lending removes one reason for higher rates.
But the key benchmark the RBA uses when setting interest rates is inflation. With the economic activity likely to do well, that makes the CPI the most important piece of domestic data this year. Underlying CPI is currently around 1.75%. Surveys indicate that consumers and firms see very little in the way of general price rises. Modest wages growth are keeping cost pressures for most firms low, and therefore the need to increase prices is also low. We get our next CPI update on January 31.
But talk about inflation and what it means for interest rates is for the future. For now the headlines are about the strong growth in jobs. And a getting headline was something that Mae West was also very good at.
We live in interesting times