Yong-Long Lai

Equity markets are continuing their sell-off today, so the delicate balancing act facing the RBA next Tuesday week gets more complicated by the day.

If not for sub-prime contagion, even before next Wednesday s publication of the December quarter CPI, the case for another cash rate hike would be compelling, but nothing is clear cut when the actual crystallisation of upside inflation risks that have been bubbling for months clashes with the unknown but potentially significant downside growth implications of sub-prime contagion.

Yesterday s labour force data would have done nothing to extinguish the RBA s concern about inflation, because it is clear that employment growth remains robust, and moreover that the bulk of it is full-time job creation.
Accordingly, while the labour market is a lagging indicator of economic activity, month after month of solid full-time jobs growth would ordinarily support, and still does, to a significant degree, the case for the maintenance of solid household consumption, which accounts for 60 per cent of GDP. But the caveat, of course, is to what extent the lagged effect of a series of interest rate rises in recent weeks/months/years in the face of plunging equity prices right here and now negates solid, sustained full-time jobs growth and the strong increase in aggregate household income that goes with it.

The attached detailed summary of the December labour market data incorporates our usual quarterly state by state breakdown, and being the last month of the year, a bit of calendar year average analysis to boot.

While annual full-time employment growth in Queensland and WA combined is running 0.8 of a percentage point higher than in NSW and Victoria combined, the gap between the resource rich states and the two most populous states was lapping at five percentage points in early 2005, and was still more than three percentage points a year ago. And the convergence is not so much due to a sharp slowing in full-time jobs growth in the big mining states (although it has come off the boil in both) but rather NSW and Victoria have accelerated towards the booming states.

The narrowing of the gap in the two-speed economy is not only apparent in the labour force, but in a number of other key indicators as well, including household consumption, which has picked up momentum in NSW in particular after lagging significantly while Sydney house prices corrected in 2004 and 2005.

(See attached file: 2008-01-18_December_Quarter_Labour_Force.pdf)

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Alan Langford
Chief Economist
HBOS Australia
Level 8
BankWest Tower
108 St. Georges Tce, Perth
Western Australia 6000
phone: +61 08 9449 6354
fax: +61 08 9449 6266
e-mail: alan.langford@hbosa.com.au

The information contained in this publication is of a general nature and is not intended to be nor should it be considered as professional advice. You should not act on the basis of anything contained in this publication without first obtaining specific professional advice. To the extent permitted by law, HBOS Australia Pty Ltd, its related bodies corporate, employees and contractors accepts no liability or responsibility to any persons for any loss which may be incurred or suffered as a result of acting on or refraining from acting as a result of anything contained in this publication.

2008-01-18_December_Quarter_Labour_Force.pdf