Australia’s September unemployment rate drops to 6-year low, well below RBA’s year-end forecast

Australia’s strong labour market report for September saw the unemployment rate drop to a six-year low of 5.0 percent, well below the RBA’s forecast of 5-1/2 percent for year end. With leading indicators for the labour market pointing to ongoing solid growth in employment, the unemployment rate is expected to continue to gradually trend lower, according to the latest report from ANZ Research.

Employment rose a modest 5.6k in September, after the 44.0k jump in August. The strength was concentrated in full-time jobs (+20.3k), while part-time jobs fell (‑14.7k). The participation rate dipped down to 65.4 percent from 65.7 percent, potentially suggesting to some analysts that the drop in the unemployment rate is somehow less ‘real’ than it appears. Careful interpretation of the participation rate data is important.

The RBA’s latest forecasts have the unemployment rate at 5-1/2 percent by the end of 2018 and 5-1/4 percent by the end of 2019. The drop in the unemployment rate to 5 percent in September suggests that the November SoMP will likely see the forecast trajectory for the unemployment rate nudged down to reflect the lower starting point. A forecast of under 5 percent by the end of 2019 seems likely.

"We expect that the RBA is, however, less likely to upgrade its inflation forecasts on the back of the improved outlook for unemployment. Given Australia’s experience to date, and the experience of a number of overseas economies, it is likely that the unemployment rate will have to track below current estimates of the NAIRU for some time before material wage pressures emerge," the report also commented.