Australia’s Surging Employment Aids Budget Bottom Line, Outlook

(Bloomberg) -- Australian hiring surged for the fifth time in six months and, together with iron ore-price strength, allowed the government to forecast an improved bottom line.

The economy added 90,000 jobs last month after an upwardly revised 180,400 gain in October, the Australian Bureau of Statistics said Thursday. An hour later, the government said in its mid-year update that unemployment will peak at 7.5% in the first quarter of 2021, down from a previous 8% estimate.

It also announced a narrower budget deficit of A$197.7 billion ($149.9 billion) in the current fiscal year, or 9.9% of gross domestic product. A deficit of A$213.7 billion, or 11% of GDP, was forecast in the delayed budget handed down in October.

Australia’s economic authorities have been upgrading the outlook as the lifting of pandemic restrictions in the southern state of Victoria has seen household sentiment soar and activity rebound. The government’s October budget was full of handouts, and followed by a fresh round of monetary stimulus the next month.

Thursday’s labor market data showed unemployment fell to 6.8% from 7% in October -- a feat all the more impressive as the participation rate rose 0.3 percentage point to 66.1%, as more people hunted for work.

The data showed ongoing strength in Victoria, where employment increased by 74,000 in November. The state’s emergence from one of the world’s toughest lockdowns has triggered a spending and hiring spree.

A Westpac Banking Corp. survey showed concern about unemployment dropped 16% this month, with the measure of labor market insecurity falling to the lowest level since May 2011 in a positive sign for consumer spending.

Thursday’s budget update showed the economy is expected to expand by 4.5% in 2021, an upgrade from the October estimate of 4.25%. Treasury sees unemployment gradually falling to 5.25% by June 2024.

What Bloomberg Economics Says...

“An earlier, and stronger, than expected domestic economic recovery is welcome news, but running ahead of global peers could prompt a reassessment of the trajectory for Australian monetary policy. The RBA faces a delicate balance over 2021, providing further easing to combat currency appreciation, while macro prudential policy tools are likely to be deployed to suppress a buildup of financial stability risks.”

-- James McIntyre, economist

For the full note, click here

The economy’s outlook is clouded by a deterioration in Australia’s relationship with China. Beijing has imposed a series of trade restrictions on Australian agricultural products, and this week extended them to coal. At the same time, the price of iron ore has strengthened, offsetting some of the pressure. China is the largest buyer of the metal and Australia is the biggest producer.

Treasury predicts iron ore will fall to $55 a ton in the third quarter of next year, a conservative estimate given it hit a nine-year high of $160 last week. The discrepancy helps set up a budget windfall.

Treasurer Josh Frydenberg mentioned the limiting of Australia’s access to international export markets as a potential risk to the economic outlook, a thinly veiled reference to its largest trading partner.

He also warned that an increase in domestic uncertainty could lift household savings and lower consumption. The most likely driver of such uncertainty would be another serious Covid outbreak.

Australia’s largest city Sydney is currently battling to prevent a Covid outbreak after six new cases in the past two days ended a more than monthlong run with limited community transmission.

©2020 Bloomberg L.P.