BCEC Monthly Labour Market Update – January 2023

Evidence of downturn builds, but unlikely to save mortgage holders from further pain

Can we get inflation under control without driving the economy into recession? That’s the big challenge for Australian policy-makers for 2023.

After eight consecutive interest rate rises from May to December, 2022, bringing the cash rate target from 0.10 per cent to 3.10 per cent, last month’s MLMU suggested the December labour force figures offered the first hint that interest rates may be starting to bite, despite a sizeable increase in full-time employment of 17,600 jobs.

Figures from the January Labour Force Survey reinforce that assessment, with further falls in employment and hours worked, rising unemployment and underemployment, and more people withdrawing from the labour force.

This time full-time employment followed the script, falling by 43,300, or almost 0.5 per cent. The headline unemployment rate increased by 0.2 percentage points to 3.7 per cent.

The RBA has already increased rates by a further 25 basis points to 3.35 per cent since the January survey.

These early signs of softening labour demand are unlikely to save mortgage holders from another interest rate rise at the RBA’s March meeting, and probably several more.

The most recent quarterly Consumer Price Index (CPI), the key measure of inflation, shows prices up by 7.8 per cent over the year to the December quarter and by 1.9 per cent from the previous quarter, way above the RBA’s inflation target range of 2-3 per cent per annum.

The underlying strength of the labour market does not suggest any significant easing in inflationary pressures.

The unemployment rate remains just 0.3 percentage points off its 50-year low, and the participation rate of 66.5 per cent just 0.3 percentage points below its historical high. Advertised vacancies remain high in historical terms and actually rose by 2.0 per cent in January.

We’ll get an update on trends in prices on 1 March when the ABS releases January estimates from the recently introduced monthly CPI indicator. However, expect more job losses and higher unemployment as interest rates are pushed up to curb inflation.

That’s tough on those with a home loan, catastrophic if you have a home loan and you lose your job.

Wages are another important part of the outlook. With December quarter figures for both Average Weekly Earnings and the Wage Price Index due for release in the days following this monthly labour market update, BCEC will post a further briefing note on wages next week.

Signs of weakening cross the Nullarbor

The results of January’s Labour Force Survey suggest the WA labour market is also beginning to falter. Total employment decreased by 5,400 jobs over the month, which included a drop in the number of men employed full-time by 7,200.

Total employment in WA remains lower than in April of last year, marking three-quarters with zero net jobs growth. The State’s unemployment rate rose marginally to 3.6 per cent, but this was suppressed by a fall in the participation rate of 0.3ppt to 68.8 per cent as a net 4,000 West Australians left the labour market.

With interest rates doing most of heavy lifting to tackle inflation, responses in housing markets will be critical in determining how any downturn plays out across the states.

Property markets in Sydney and Melbourne are generally seen to be more susceptible to a crash than in Perth. While commodity prices remain strong, WA may be spared the worst of the coming downturn.