Unemployment data throws further rate cuts into doubt

The unemployment rate increased by 0.2% in May, new statistics show, with the data potentially dampening the probability of an interest rate cut in August.

According to the Australian Bureau of Statistics, the unemployment rate increased 0.2% to reach 5.1% in May. There was also a 0.3% increase in the labour force participation rate, which now sits at 65.5%.

The ABS said the number of people employed increased by 38,900 to reach 11,537,900 in May. The increase was driven by increased full-time employment, up 46,100 to 8,107,900.

However, it was offset by a decrease in part-time employment, down 7,200 people to 3,430,100. Overall, the number of people unemployed increased by 22,400 to 622,800 in May.

According to Westpac, the recent volatility in the employment numbers is “more about statistical noise” than actual outcomes.

“As such, we point the unemployment rate averaging 5.1% so far this year as a better indicator of the state of the labour market,” Westpac said.

“We suspect that the RBA will concentrate on the unemployment rate rather than trying to read too much into the month to month volatility in the employment numbers.”

According to Westpac, labour demand is set to soften over the next few months, which means a target for the unemployment rate to rise to 5.75% by the end of 2012 “is still a realistic target”.

On a state by state basis, Westpac said WA remains the powerhouse for employment, which has “lifted 42,200 so far this year, even though employment lifted a marginal 2,500 in May”.

Encouragingly, Westpac said there has been “a bit of a turnaround” in the south eastern states, which continued in May.

“NSW’s employment lifted 30,300 in May, resulting in a total rise of 39,900 so far this year,” it said.

“We are still surprised by the strength in the Vic labour market where total employment lifted 13,500 in May and is now up 33,500 so far this year.”

In contrast, Queensland “continues to disappoint”, with total unemployment up just 1,700 so far this year, on the back of a 5,700 fall in May.

“Queensland also has the highest unemployment rate for any mainland state at 5.7%,” Westpac said.

According to ANZ, the probability of an RBA rate cut in August has fallen in light of the latest unemployment data, which it described as “undoubtedly strong”.

“Coupled with yesterday’s much stronger than expected Q1 GDP data, today’s data are likely to lead some to pare back their expectation of the scale of RBA rate cuts,” ANZ said.

“We continue to expect the RBA to take a gradual approach to policy easing, and to closely watch incoming data – job ads are very important in this regard.”

“Market pricing, however, still suggests an 80% chance of a 25 basis point rate cut in July, with total cuts of 100 basis points still priced in by the end of the year.”