By Chris Shaw

Australian labour market figures for June were far stronger than the market had forecast, with employment soaring by 45,900 jobs compared to a consensus range of gains between 15,000-20,000 positions. The unemployment rate was steady at 5.1%.

A breakdown of the data showed full-time positions rose by 18,400 and part-time by 27,500, while the May result was revised to a gain of 22,800 from 26,900 previously. Westpac notes while part-time positions drove the increase this month, the fact full-time positions increased for the tenth consecutive month was a positive.

The strong May data encouraged people back into the labour market, reflected in the participation rate increasing to 65.2% from 65.1% previously. Average hours worked fell slightly, declining by 0.4% from the record high of the previous month.

One positive in the data according to Westpac is there remains spare capacity in the system, as while averaged hours worked actually rose in trend terms for the fourth straight month this measure remains 1.9% below the peak level of mid-2008.

In the view of CommSec chief economist Craig James, if unemployment falls slowly over time it is not a situation to be feared, and this is what is happening in Australia at present. James suggests it is only when the job market is tightening rapidly and employers don't have time to react it becomes an issue for wage pressures, higher inflation and therefore the potential for rate hikes.

Further falls in the unemployment rate are expected in coming months, Westpac's forecasts calling for a rate of 5.0% by the end of the year. CommSec is more aggressive, forecasting unemployment of 4.8% by the end of this year and 4.5% by the middle of 2011.

ANZ senior economist Riki Polygenis also sees unemployment in Australia as having a good chance of falling below 5.0% by the end of the year, especially as leading indicators of employment point to a solid labour market in coming months.

CommSec's James suggests today's data does pose some issues for policymakers as it highlights a somewhat two-speed Australian economy. As an example he notes the jobless rate in Tasmania has risen to 6.5% but in both territories it is below 3% and it is at 4% in Western Australia.

This comes at the same time a tighter labour market is likely to see some increase in wage pressures, as employers will feel a need to keep staff happy. James expects this wage pressure will contribute to the Reserve Bank of Australia (RBA) re-commencing rate hikes later in the year to a cash rate of at least 5.0%.

ANZ's Polygenis agrees the next move in interest rates by the RBA is likely to be up rather than down, as further falls in unemployment are likely to add to inflation concerns, especially as the current strong trade surplus shows the Australian economy remains on a solid footing.

While further hikes are likely according to Polygenis, the suggestion is the RBA won't act on rates until financial market volatility falls and there is greater clarity as to the extent of the current slowdown in Chinese economic growth.

Westpac notes on the back of the labour market data the Australian dollar strengthened, moving from USD0.8665 to settle around USD0.8730/35. The bank sees further gains as likely, though strong selling is expected to emerge around the USD0.8860 level.

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