Unemployment falls to 3.9%, showing little urgency for the RBA to adjust policy

Tapas Strickland | Markets Research 

Key points:

• Unemployment falls to 3.9% vs. 4.2% consensus and 4.1% prior
• So far qtr ave. unemployment is 4.0% vs. 4.3% in the RBA November SoMP
• Labour market re-tightening, if sustained, would pose a problem to inflation confidence
• NAB continues to see the RBA moving in May with risks broadly balanced

Details:

Unemployment in November surprised sharply, falling two tenths to 3.9% from 4.1% (consensus and NAB 4.2%). The unemployment rate is now back to its equal lowest since March 2024, and outside of summer hiring volatility in the February 2023 data, you have to go back October 2023 to find a lower unemployment rate.

Other measures of labour market slack also fell back. Underemployment (those employed but wanting and able to work more hours) fell a tenth to 6.1%, its equal lowest since April 2023. There was nothing in the survey sub-samples to suggest today’s result was driven by sample variability.

Driving the fall back in the unemployment rate was strong employment of 35.6k (vs. 25.0k consensus) with a decent full/part time split (full time 52.6k, part-time -17.0). The participation rate also fell back a tenth to 67.0% but remains near record highs.

The employment to population ratio rose a tenth to 64.4%, its equal highest ever, and continues to show the labour market absorbing very strong population growth. Over the past year the civilian 15 years plus population has increased by 521.k, or by 2.4% y/y.

The stark divergence in state unemployment rates has closed a little with the unemployment rate in VIC now 4.2% (from 4.5%), while unemployment rates continue to be lower elsewhere with QLD, NSW, SA and TAS having an unemployment rate of 3.9%, and WA is even lower at 3.3%.

Implications:

Today’s labour market data should challenge the newfound degree of confidence the RBA had in their inflation forecasts. The unemployment rate for Q4 so far is averaging 4.0%, which is three tenths below the RBA’s November SoMP forecast track of 4.3%.

While the labour market isn’t a source of inflationary pressure in of itself according to the Q3 WPI, it should challenge the degree of confidence in the inflation path. That confidence was built because “wage pressures have eased more than expected in the November SoMP” and Q3 GDP data showing “incomes and consumption had recovered a little slower than forecast”.

However, little was expressed on the degree of confidence regarding productivity and its implications for inflation returning to target. This was a question your scribe asked to the RBA Deputy Governor at last night’s ABE function, where Mr Hauser noted the Board had not updated their thinking.

Strong employment growth, if not accompanied by productivity growth, would challenge the degree of confidence in the inflation path. The November RBA Minutes noted “persistent weakness in productivity growth would not only erode long-run real income growth but could also boost inflation over the forecast period if wages growth did not adjust in a sufficiently timely manner”.

NAB continues to see the RBA moving in May with risks broadly balanced. There is one more employment print and the Q4 CPI ahead of the RBA’s February meeting. While we expect Q4 CPI to be a little below the RBA's November forecast, that alone is unlikely to be enough to see the RBA cut in February given the labour market continues to suggest little urgency for the RBA to adjust policy settings.

Chart 1: Unemployment rate falls back to its equal lowest since March 2024, tracking below the RBA's November forecast track

Chart 2: Employment growth was around trend

Chart 3: The participation rate fell a tenth, but remains near record highs

Chart 4: Underemployment also fell

Chart 5: Employment growth was led by full time

Chart 6: The fall in the unemployment rate contrasts sharply to offshore

Chart 7: Australia's labour market continues to absorb very strong population growth

Chart 8: State divergence in unemployment rates narrow, but VIC still has the highest unemployment rate

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