QE Could Be Coming to Australia

Australia’s best three months of hiring since 2004 has brought the jobs market into line with buoyant business conditions—signaling the economy could be in better shape than recent GDP data showed.

At the Reserve Bank of Australia, there’ll be some relief. For months, it’s repeated that forward indicators suggested higher employment and lower unemployment were in the offing, as the jobs market turned in circles or even weakened, Bloomberg reported.

“The labor market has started to catch up to the strength in other indicators,” said Daniel Gradwell, a senior economist at Australia & New Zealand Banking Group Ltd. “We expect employment will continue to rise and provide some much-needed support to households.”

With unemployment now at a more than four-year low of 5.5%, Governor Philip Lowe’s conviction that monetary policy is easy enough will be reinforced. Thursday’s data showed unemployment even fell in mining powerhouses Western Australia and Queensland, possibly reflecting the end of a years-long unwind in resource investment and its associated drag on economic growth.

On top of that, the report showed hours worked climbed by 1.9% in May, the best performance in 11 years, while the underemployment and underutilization rates declined. Business conditions—a measure of hiring, sales and profits—have been strong in Australia since late last year.

But the real question is whether a tightening labor market encourages workers to seek higher wages, which have gone backwards when inflation is taken into account.

At the same time today’s job figures were released, the RBA issued a research paper on NAIRU, or the non-accelerating inflation rate of unemployment, which it put at 5%—or half a percentage point below where we are now. When the NAIRU is below the jobless rate, that signals spare capacity in the market and downward pressure on wages and inflation.

That’s a scenario that David Plank and Felicity Emmett, senior members of ANZ’s economic team, have obviously been studying, releasing an excellent note this week as to what steps policymakers may take should the household sector weaken further.

While ANZ says the economy is likely to “muddle through” the next 18 months, forecasting that growth will average 1.8% this year before accelerating to an around-trend level of 2.7% in 2018, it does not think that it will be enough to make a meaningful dent in the unemployment rate over this period, “raising doubts about the return of inflation into the RBA’s target band over the next few years”.

And while that’s unlikely to see the RBA deliver additional rate cuts in its opinion, should the economy underperform its expectations, it says that the RBA will feel it has little choice but to resume easing.

 “In the first instance we think this will take the form of additional rate cuts, with the cash rate falling to 1%,” says Plank and Emmett. “We think there is a good chance the RBA will match these rate cuts with a discussion of possible QE measures—to prepare the way should these be needed and also to signal the policy stance, namely that this is more than just a tweak in the policy setting.

  Sluggish Spending

The problem is that from the US to Britain to Germany, full employment has failed to embolden workers to demand and receive fatter pay packets. If Australia follows this trend, its economy is likely to bumble along at a slower pace as highly-indebted consumers find themselves constrained from spending.

Given consumption accounts for more than half of GDP, it’s hard to grow much faster than Aussies are spending, which data last week showed increased at a measly rate of 0.5% in the first three months of this year.

For Adam Boyton, Deutsche Bank AG’s chief economist for Australia, real GDP growth at about 1.75% and the strength in employment and hours worked implies zero productivity growth. And that’s a problem.

If “one takes the view that productivity and wages growth are linked—as this economist does—then the weakness in productivity growth entrenches the weakness in wages growth,” he said in a note. “That in turn keeps pressure on the household sector and limits the scope for a pick-up in consumer price inflation.”

As a result, Thursday’s jobs report left Boyton’s views on the RBA cash rate unchanged—for no move either this year or next.