Unemployment plummets to 4.2%. What does this mean for interest rates?

The unemployment rate fell to 4.2 per cent in December as more than 64,000 people returned to the workforce.

This is the lowest it's been since August 2008 and before that you have to go back to the 1970s to find an unemployment rate lower than 4%.

This is running 12 months ahead of the RBA’s forecasts, causing more speculation that the RBA may have to increase interest rates earlier than anticipated.

However, the 65,000 extra employed in December pales in comparison to the 366,000 increase in November 2021.

Here's what the data shows

1. Employment growth was also strong at 64,800 on the back of reopening with the level of employment now 1.9% above its pre-pandemic February 2020 level.
2. The unemployment rate fell from 4.6% to a 13-year low (since August 2008) of 4.2% in December.

3. Total employment hit a record high of 13.242 million in December.

4. The participation rate was unchanged at 66.1%.

5. Hours worked lifted by 1% in December to 1,818.8 million, up 3.7% on a year ago.

6. The youth jobless rate fell from 10.9% to a 13-year low of 9.4% in December. And the youth participation rate rose from 70.1 to a 13-year high of 70.5%.

7. Unemployment varied across the states and territories in December: NSW 4%; Victoria 4.2%; Queensland 4.7%; South Australia 3.9%; WA 3.4%; Tasmania 3.9%; Northern Territory 4.2%; ACT 4.5%. Only in the ACT did unemployment go up from 3.8%! (That’s a story for another day!)

Clearly the labour market was incredibly strong just prior to the Omicron wave in Australia (the latest data reflects the labour market in the two weeks to 11 December)

Omicron will negatively impact the economy and the January and February numbers are likely to be down for a number of reasons:

1. Even though the lockdowns have been lifted many Australians are hunkering down trying to avoid Omicron and therefore not spending as much.
2. Business closures (even short-term because of lack of staff) will hurt employment and unemployment numbers. More Aussies are working less or no hours.
3. Supply chain difficulties are making things difficult and more expensive for both business and consumers.

I believe the underlying economy is still strong and provided we reach the peak of Omicron soon (as is anticipated) we should see a quick and powerful rebound in the economy.

Remember the resilience of our economy is underpinned by significant household and business savings accumulated through the pandemic and many of us are champing at the bit to get on with life.

About Brett Warren Brett Warren is National Director of Metropole Properties and uses his two decades of property investment experience to advise clients how to grow, protect and pass on their wealth through strategic property advice.