It has been apparent for some time that Australia’s economic golden years are fading into the rear-view mirror. However, it was still surprising to see in yesterday’s report on the state of the Australian labour market just how difficult the situation has become for Australian workers in recent months.
The most widely watched indicator of the labour market, being the unemployment rate, moved just 0.1% higher in the month of December, to 5.8%. At the start of 2013 it was 5.4%, and in June it was 5.7%. Hence, the unemployment rate did not rise materially in Australia over 2013. This would tend to suggest that while employment prospects are not great at present, they were not particularly weak either.
However, as in many countries in the world at present, the unemployment rate is only telling part of the story.
When national statistical agencies calculate unemployment, people are first asked if they are actively looking for work. If the answer is no, then you are not considered part of the labour force. If the answer is yes, then you are ‘participating’ in the labour force, and will be counted either as employed if you have a job, and unemployed if not.
The unemployment rate is then calculated as the number of people unemployed (looking for work, but without a job) divided by the labour force.
The crucial piece of this story in Australia over the past six months is that fewer and fewer people are actually looking for a job. Technically, this reduces the number of unemployed, and holds down the unemployment rate compared to where it would otherwise have been. However most of these people saying they are not looking for a job are probably doing so because they do not expect to find one – which is bad news.
Indeed, if the participation rate had not changed from its prior cyclical low (September 2009), then the unemployment rate in Australia would now be 6.9%, and would have risen by a full 1% since June.
We believe this provides a more accurate reflection of how difficult conditions are for Australian workers at present. Conditions are nowhere as bad as in the early 90’s recession (11% unemployment) – but they are a lot worse than the low published unemployment rate of 5.8% would suggest.
Of course, New Zealand’s recent performance provides a sharp contrast.
NZ’s unemployment rate of 6.2% (as of the latest data, for September 2013) fell by 1% versus the prior year. The total number of jobs here grew by 2.4% over that time. Participation in our labour force has improved, and we now have 64.3% of the working age population in employment, up by 0.8% over the year. All of these indicators highlight a labour market that has made strong steps forward over the year.
What does all this mean for investors? In short, while conditions are not yet strong, the labour market in New Zealand is improving. This helps create a virtuous cycle of more spending, more jobs, and lower welfare costs. These factors tend to support share markets, provided the situation does not get too strong such as to require much higher interest rates to quell inflation.
In Australia, the labour market has weakened considerably in recent months. This means pressure on profits for consumer-facing companies. The good news is that indicators for the future health of the Australian labour market such as confidence, house prices, and job advertising are improving. This suggests the recent weakness should stabilise.
However, if it does not, the Reserve Bank of Australia will be forced into cutting interest rates again. That would mean that parity on the Australia-New Zealand exchange rate becomes a real possibility.
David Lewis
Portfolio Manager