Key insights from the week that was.
Australia’s labour market showed strength in February, with almost 89k jobs created in the month and the unemployment rate declining from a revised 6.3% to 5.8% as the participation rate remained unchanged. Hours worked also rebounded in February to be up 0.2% year-to-date.
Employment in the Australian economy has now essentially recovered the losses from the pandemic, being broadly in line with the level seen in February 2020. And, in stark contrast to the US and many other nations across the world, participation in Australia is higher than it was pre-pandemic. It is this stronger participation that explains the difference between February 2020’s 5.1% unemployment rate and February 2021’s 5.8%.
Still, considerable slack remains in our labour market. At February, the underemployment rate was 8.5%, up from 8.2% in January. Those working zero hours for economic reasons also rose in the month, we estimate by around 25k to 107k after seasonal adjustment.
Governor Lowe and the RBA have made clear recently that there remains a long road to full employment and conditions consistent with inflation at target, with an unemployment rate in “the low 4s” potentially achievable. Note also, an additional headwind for the labour market looms, with the JobKeeper program set to expire at the end of this month.
This week, Westpac Chief Economist Bill Evans assessed the RBA’s key messages on policy from recent communications as well as our expectations for the policy outlook. The RBA clearly remains committed to the 3-year yield target of 10 basis points, though, as yet, are not in a position to decide whether to extend this operation by switching the policy’s target from the April to November 2024 bond. We see this decision to extend most likely being made in August, based on the RBA’s forecast timing of when it expects to attain its inflation, wage and full employment targets.
Of course, as we have highlighted repeatedly, the RBA will also have to assess international conditions, particularly the policy stance of major central banks. This week at their March meeting, the US’ FOMC made clear that, while prospects for recovery are very strong thanks to the Biden administration’s stimulus, the FOMC believe ultra-accommodative monetary policy will remain necessary for the foreseeable future.
Specifically, during Q&A at the press conference, Chair Powell made clear the Committee is not yet ready to begin talking about tapering asset purchases, meaning this is unlikely until the second half of 2022. The median fed funds rate expectation of the Committee for the end of 2023 remains the lower bound of 0.125%. Notably, only at that point is inflation expected to be sustainably above the 2.0%yr medium-term target, well after the output gap is expected to have closed.
For the Australian and New Zealand economies, such extraordinary monetary policy accommodation is a clear positive, bolstering the prospects for US and global growth as well as confidence. However, there are also currency implications to consider: a rising Australian/NZ dollar dampens domestic inflation pressures and will reduce each nation’s competitiveness versus other nations such as the US and Europe, all else equal. Australia and New Zealand’s economic outperformance through the pandemic, a 2020 loss of around 1.0%yr at December against nearly -2.5%yr for the US, is also supportive of these currency trends.