BCEC Monthly Labour Market Update – April 2024

• Unemployment rate edges over 4 per cent despite solid employment growth, albeit only in part-time jobs.
• Vacancies and wages moderate, consistent with a gradual softening in the labour market.
• A rapid fall in the rate of employment growth and/or in immigration needed for the Treasurer’s optimistic scenario for inflation to fall in place for 2024-25.

Duelling inflation forecasts: what do April’s labour force figures mean?

With the 2024-25 Commonwealth Budget released two days before the April labour force figures, the budget forecasts set up an intriguing discrepancy in the Treasury’s and Reserve Bank’s outlooks for inflation. How the labour market fares in coming months will be critical in determining which one prevails, with important implications for the prospects for, and timing of, a cut in interest rates.

The April labour force figures didn’t give much away. Employment grew by a solid 38,500 jobs in the month (0.3 per cent), but all of that growth was in part-time jobs, while full-time employment fell marginally. The number of job vacancies advertised eased further but remains at levels consistent with strong ongoing demand for workers.

The headline unemployment rate rose from 3.9 per cent to 4.1 per cent, but was a whisker from being rounded down to 4.0 per cent. As we keep stressing, the unemployment rate running at around the 4 per cent mark, as the labour force expands at its current rate, is testament to strong underlying labour demand. The April estimates show a further increase in the working-age population of 57,000 persons.

The budget forecasts inflation to come in at 3.5 per cent in the current quarter, moderating to 2.75 per cent by the June quarter of next year. That latter figure is within the Reserve Bank’s target range of 2-3 per cent, opening the opportunity for the RBA to start cutting interest rates from the current 4.35 per cent. This has important political implications for the government, which will be hoping to see some interest rate relief before the next election, which must be held by the end of September of 2025.

In his budget speech, the Treasurer even suggested inflation may be back below 3 per cent by the end of this year. In contrast, the RBA’s latest forecasts have inflation at 3.8 per cent by the end of this year, and not returning to target range until the December quarter of 2025 (post-election).

Treasury’s inflation outlook is predicated on a weakening labour market, with an unemployment rate of 4.0 per cent for this June quarter, rising to 4.5 per cent in the June quarter, 2025. With the benefit of the April figures, the budget forecast for employment growth this quarter is more consistent with an unemployment rate of 3.6 to 3.9 per cent for the quarter, depending on the participation rate.

That suggests a more dramatic slowdown in employment growth will be required for the labour market to soften in line with the budget outlook and the Treasurer’s more optimistic view on inflation. The budget forecast is for annual employment growth to slow from 2.75 per cent this quarter to 0.75 per cent to the June quarter of next year. For that to occur along with the projected unemployment rate of 4.5 per cent, the rate of growth in the working-age population – and therefore immigration – will need to fall by almost half from the current level.

Hence one reason for the difference in the Treasury and RBA projections for inflation returning to target may be that the Treasury are more confident in a rising unemployment rate playing its part in reducing price pressures. The RBA’s May statement on monetary policy noted ‘unemployment is expected to increase more gradually than previously anticipated’.
The unemployment rate largely impacts upon inflation through the effect on wages. The most recent data show the Wage Price Index increasing by 0.8 per cent in the March quarter, 2024, down from 1.0 per cent in the previous quarter. The new budget forecasts have annual growth in the WPI moderating from 4.0 percent this year to 3.25 per cent for 2024-25. This would mean continued real wage growth given the inflation forecast of 2.75 per cent. However, higher wage growth also makes it harder to constrain inflation. This would further threaten the Government’s optimism on reining in inflation and particularly if, as we suspect, the labour market turns out to be stronger than the forecasts assume.