AUSTRALIAN ECONOMIC DEVELOPMENTS
This week the RBA reiterated its view that there is no case for a near-term change in the cash rate. Eventually the “next move in the cash rate would more likely be an increase than a decrease”. Australia’s economy is growing faster in 2018 than it did in 2017 and inflation is gradually moving back toward the RBA’s target band of 2-3%. The Minutes of the July Board Meeting – where the cash rate was kept at 1.50% - indicate the RBA is increasingly concerned about the high level of household debt in Australia, which is contributing to higher vulnerability to economic shocks and slower growth in local household consumption. Internationally, the IMF expects global economic growth to accelerate in 2018 and into 2019, but warns that new risks to the outlook are mounting due to escalating trade tensions and political uncertainty affecting several regions (see below).
The RBA’s upbeat assessment of the Australian economy in 2018 was confirmed by the latest Australian labour market data (released this week by the ABS), which indicated relatively strong growth in employment (+51,000 and 2.8% p.a., seasonally adjusted), rising labour participation (65.7%) and a gently falling unemployment rate (5.4%) in June 2018. In trend terms, the unemployment rate has been very slowly falling since early 2017 and is now at its lowest since early 2013. The proportion of the workforce in part-time work (under 35 hours per week) remains elevated however, at 31.9% of all workers. The underemployment rate (those working but willing and able to work more hours) is also relatively high, at 8.6% of the labour force (9% of all workers). This suggests there is more ‘spare capacity’ than is indicated by the unemployment rate alone.
The OECD’s Employment Outlook 2018 (released last week) also confirmed that labour market conditions are improving in Australia. In the first quarter of 2018, 67% of Australia’s adult population (aged between 15 and 74 years) were working, which is about 5 percentage points above the OECD average. Australia’s unemployment rate in the first quarter of 2018 was at 5.5%, just above the OECD average of 5.4%. The unemployment rate has since fallen to 5.4%.
Less positively, ABS data indicated that a lower proportion of Australian businesses undertook various innovative activities in 2016-17, relative to one year earlier. The fall in that year was particularly evident among manufacturing businesses. Disappointingly, a significant proportion of all businesses remain ‘inactive’ with regard to innovation, with access to funding and skills identified as their main barriers. For those that did undertake some innovation activity in 2016-17, the main source of ideas for innovation came from within the business and the major benefits from innovation included increased revenue and enhanced customer service.
IMF forecasts strongest global growth since 2011 but risks are rising
In its latest World Economic Outlook Update, the IMF forecasts growth in global output of 3.9% p.a. in each of 2018 and 2019 (as it did in its last Update in April 2018). If realised, this would be the fastest rate of global growth since 2011. However, the IMF warns that downside risks to the outlook have increased. While there was no update for Australia in this latest Outlook, in April the IMF forecast Australia’s economic growth at 3.0% in 2018 and 3.1% in 2019.
Among both advanced and developing economies, growth prospects are becoming more uneven. In advanced economies, growth divergences between the United States on one side, and Europe and Japan on the other, are widening. The United States is forecast to grow by 2.9% in 2018 and 2.7% in 2019 driven by stimulatory tax cuts, low levels of unemployment and robust demand. In contrast, Japan’s forecast for 2018 has been cut by 0.2 percentage points to 1.0% in 2018 following a contraction in the first quarter, owing to weak private consumption and investment. Japanese economic growth is being limited by an ageing and (uniquely) shrinking population. On a per capita basis, Japan’s economic growth is not dissimilar to other advanced economies.
Growth is also becoming more uneven among developing economies due to rising oil prices. Many oil producing countries are likely to do better, while many oil importing countries have been downgraded. For example, Saudi Arabia – a net oil exporting country- is likely to grow by 1.9% in 2018 (up by 0.2 percentage points from IMF forecasts in April), whereas India – a net oil importing country – is likely to grow by 7.3% in 2018 (down by 0.1 percentage points from IMF forecasts in April). In India, the IMF expects higher oil prices to detract from domestic demand and to push up inflation due to rising input costs. Growth in China is projected to slow to 6.6% in 2018 and 6.4% in 2019 as regulatory tightening of the financial sector takes hold.
The IMF says that escalating trade tensions are the greatest near-term threat to global growth because it damages confidence, asset prices and investment. The re-emergence of trade threats is especially disappointing because global growth strengthened in 2017 to 3.7% p.a., due in part to a notable rebound in global trade in that year. Global trade volumes increased by 5.1% in 2017, accelerating sharply from 2.2% p.a. in 2016. In contrast, the IMF has reduced its forecasts for global trade volumes by 0.3 percentage points in 2018 and 0.2 percentage points in 2019.
In response, the IMF recommends multi-lateral cooperation within an open, rule-based trade system (such as through the World Trade Organisation) and resolve disagreements without raising tariffs and/or non-tariff barriers. In order to strengthen their medium-term growth prospects, the IMF recommends that countries should prioritize supply‑side measures that raise potential output and productivity, including investing in physical and digital infrastructure, boosting labour force participation (e.g. of older people) and enhancing workforce skills.
Jobs growth continues in June 2018
The ABS estimates that total employment increased by 50,900 people and the unemployment rate held steady at 5.4% in June (seasonally adjusted). This lack of movement in the unemployment rate occurred because the increase in jobs was almost exactly matched by an increase in the number of people who were actively participating in the labour market (working or searching for work); 49,800 additional people entered the labour force in June to work or search for work. More than 80% of the monthly jobs growth in June was in full-time employment (+41,200), while part-time employment increased by a smaller amount (9,700).
These monthly labour market data are volatile and are subject to revision. For example, May’s monthly increase in employment was originally reported to be 12,000 but has now been revised up to 13,500 (seasonally adjusted). For these reasons, the ABS recommends the trend estimates as the best guide to underlying patterns in the labour market 1 . In trend terms, the national unemployment rate ticked down to 5.4% in June. This was the lowest rate of unemployment since
The ABS recommends that “Trend estimates are considered the best indicators of the underlying behaviour in the labour market.” ABS 6202.0, Labour Force, Australia, Media Release. June 2018. The data below are all trend.
3
January 2013. The unemployment rate has been gradually declining since a recent peak of 6.3% in November 2014. Even more positively, monthly employment growth now appears to be picking up again after a slower patch at the start of 2018, albeit at a lower rate than the high growth rates experienced in mid-2017. In trend terms, 26,900 jobs were added in June, comprising of 13,400 full-time jobs and 13,500 part-time jobs. Over the year to June 2018, employment increased by 317,800, growing at 2.6% p.a., which was above the historical average growth rate of 1.9% (since February 1979). The share of part-employment is beginning to rise again with part-time employment (defined by the ABS as 35 hours or less per week) accounting for 31.9% of the total workforce in June 2018, just below the record high in November 2016 (see Chart 1 and Table 2).
Across the states, employment growth over the 12 months to June 2018 was strongest in New South Wales (3.7%), followed by Queensland (2.6%) and South Australia (2.3%). State unemployment rates were highest in Western Australia (6.2%) and Queensland (6.1%) and lowest in New South Wales (4.8%) and Victoria (5.3%) in June 2018 (see Table 3).
