BCEC Monthly Labour Market Update – October 2024

— Job creation slows in October, but marks seventh month of uninterrupted growth. —
— Unemployment rate steady at 4.1 per cent as participation rate eases from record level. —
— Recently released indices for prices and wages suggest inflation is easing, but remains uncomfortably high for a rate cut in 2024. —

Hint of softening labour market not enough to prompt pre-Christmas rate cut

October’s Labour Force Survey results offered no clear evidence of a change in labour market conditions. Those looking for signs of a weakening labour market in line with Treasury and Reserve Bank projections will be drawn to the slowdown in employment growth.

The 15,900 new jobs created in October represent less than half the trend rate of growth seen in recent months. However, a further increase on top of September’s 61,300 jump in employment suggests underlying labour demand remains strong.

The unemployment rate remained steady at 4.1 per cent as the participation rate eased to 67.1 per cent, 0.1ppt down from September’s record high of 67.2 per cent.

The labour force grew by 24,200 persons, with the estimated increase in the working-age population of almost 50,000 persons more than offsetting the decline in participation. Driven by immigration, the working-age population continues to expand at an annualised rate of 2.7 per cent, more than 50 per cent above its long-run trend.

While October’s labour force figures contained few surprises, there has been a stream of new information over the past month, if overshadowed somewhat by the US election.

Since last month’s MLMU, the September quarter inflation and wage price index figures have been released. The Reserve Bank Board met in early November, deciding to keep interest rates on hold and setting out their reading of the economy in the accompanying Statement on Monetary Policy.

We’ve noted previously that RBA forecasts of how quickly inflation would return to the target band of 2 to 3 per cent were more pessimistic than Treasury’s 2024-25 Budget forecasts.

The labour market has proven far more resilient than Treasury anticipated. The Budget forecasts imply an increase in the number of employed persons through all of 2024-25 of 105,000.

Employment has already increased by almost 450,000 persons to October. Quarterly inflation fell to 0.8 per cent in the September quarter, and needs to remain at that rate for the next three quarters for annual inflation to come in at the Budget’s projected 2.75 per cent annual rate to the June quarter 2025.

However, we know the current rate of inflation has been suppressed by temporary cost-of-living relief measures and will rebound as these unwind.

Forecasts in the RBA’s latest Statement on Monetary Policy are for annual inflation to fall to 2.5 per cent by June 2025, revised down from 2.8 per cent in the previous statement. Recognising the temporary impact of cost-of-living relief measures, however, the RBA expects inflation to rebound to 3.75 per cent by December 2025, well above the target rate and limiting scope for interest rate cuts.

Even with the moderation in employment growth, October’s unemployment rate of 4.1 per cent means unemployment for the December quarter 2024 is likely to be lower than even the RBA’s latest forecast of 4.3 per cent.

The wage price index (WPI) also grew by 0.8 per cent for the September quarter, and 3.5 per cent over the year. A rate cut is all but off the table for the final 2024 RBA Board meeting in December, and clearer signs that the labour market is weakening will be needed if a rate cut is to be contemplated when they reconvene in mid-February, 2025.

Real wage growth returns, but …

On paper, real wage growth returned in the September quarter 2024 as the 0.8 per cent increase in the WPI exceeded the 0.2 per cent increase in consumer prices.

As noted, much of the reduction in inflation can be attributed to temporary or one-off cost-of-living relief measures, notably electricity bill rebates.

The ‘trimmed mean’ measure of inflation, which strips out irregular or temporary price changes, shows underlying inflation matching the increase in the WPI over the quarter (0.8%) and over the year (3.5%).

By this measure, real wage growth remains stagnant, and last quarter’s gains may be reversed by real wage falls as the effects of cost-of-living measures unwind in coming quarters.

We also note that price rises in the insurance and financial services group of the CPI have been a major contributor to overall inflation, up by 6.2 per cent over the year. Yet the WPI for that sector increased only 3.0 per cent for the year.

Whatever it is that is driving up your insurance premiums and financial service charges, it doesn’t seem to be wages.