Australia jobless rate fails to fall, argues for July rate cut

Credit: REUTERS/JASON REED

Australia's unemployment rate stayed stuck at 5.2% in May as a surge in part-time hiring was met by an ever-expanding pool of labour, a sure sign of spare capacity that argued for another cut in interest rates perhaps as soon as next month.

By Wayne Cole

SYDNEY, June 13 (Reuters) - Australia's unemployment rate stayed stuck at 5.2% in May as a surge in part-time hiring was met by an ever-expanding pool of labour, a sure sign of spare capacity that argued for another cut in interest rates perhaps as soon as next month.

Yields on three-year bonds AU3YT=RR dived to all-time lows at 0.997% as the futures market 0#YIB: shifted the probability of a quarter-point cut in July to 70%, from 52% earlier.

The local dollar slipped only a modest 0.2% to $0.6914 AUD=D3 as a lot of easing has long been priced in.

The Reserve Bank of Australia (RBA) has already chopped rates to a record low of 1.25% as the economy grappled with falling home prices, sluggish wages and scrooge-like consumer spending.

In particular, an unwelcome pullback in inflation has led policy makers to conclude that unemployment needs to fall to 4.5% or lower to get wages and prices moving again.

"The data confirm the RBA's view that the economy needs to generate more jobs to reach full employment, and that policy loosening is needed to achieve this," said Sarah Hunter, chief economist at BIS Oxford Economics.

"We expect the RBA board to follow June's interest rate cut with two more this year, taking the cash rate to 0.75% by year-end."

Getting unemployment to 4.5% looks like a tough task as Thursday's data showed it held at 5.2% in May, when analysts had hoped for a dip back to 5.1%. The jobless rate got as low as 4.9% in February but has since been nudging higher.

That upturn has come even as hiring remained solid. A net 42,300 new jobs were created in May, well above expectations for a rise of 17,500.

Of those, 39,800 were part-time jobs with analysts suspecting some of that was due to temporary hiring for the Federal elections held in May.

Job gains for the year to May were a hefty 360,000, while annual employment growth of 2.9% handily outpaced the U.S. performance of 1.6%.

Yet a constant influx of skilled migrants means the labour force is also expanding rapidly. Australia's annual population growth of 1.6% is among the highest in the developed world.

Participation also climbed to a record peak of 66.0% in May as more women joined the workforce, notably in the health sector.

All of which means there is a lot more spare capacity in the labour market than previously thought, noted RBA Assistant Governor Luci Ellis in a recent speech, who portrayed the phenomenon as a welcome opportunity.

"It has become apparent that the unemployment rate that Australia can feasibly sustain is lower than it has been in at least the past 40 years. This is great news," said Ellis.

"If Australia truly can have lower unemployment – sustainably – policy should be used to try to get there."

(Reporting by Wayne Cole Editing by Shri Navaratnam)

((Wayne.Cole@thomsonreuters.com; 612 9321 8162; Reuters Messaging: wayne.cole.thomsonreuters.com@reuters.net))

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