* Employment up 2,300 vs forecast for 25,000 rise
* Unemployment rate at 5 pct, near full employment level
* Queensland floods to hit figures in Jan, help later
By Wayne Cole
SYDNEY, Jan 13 (Reuters) - Australian employment rose by a surprisingly slim 2,300 in December in what looked like pay back for a very strong increase the previous month, but unemployment still fell to the lowest in two years, underlining the resilience of the labour market.
The Australian dollar initially skidded half a cent as the rise in jobs was well below forecasts of a 25,000 increase and investors were already fretting about the potential hit to the economy from the floods swamping Queensland.
Yet the jobless rate also surprised by dropping to 5.0 percent, from 5.2 percent in November and the lowest reading since early 2009. Analysts generally consider a rate under 5 percent as being as near full employment as Australia can get without stoking inflationary pressures.
"It just shows how high the bar has been raised that these numbers would be considered soft," said Brian Redican, a senior economist at Macquarie. "An unemployment rate at 5 percent underlines just how strong the labour market still is. Vacancies also remain high and there's plenty of jobs out there."
The 2,300 rise in jobs in December followed a huge 54,600 jump in November and still brought the total gain in employment for 2010 to 364,000, a blistering performance for an economy with a potential labour force of just 12 million. An equivalent increase in U.S. payrolls would have been 4.3 million.
Thursday's data had scant impact on expectations for interest rates as the floods in Queensland had already led investors to price out any chance of another hike from the Reserve Bank of Australia (RBA) for the foreseeable future.
Interbank futures <0#YIB:> imply only a one-in-five chance of a hike in the 4.74 percent cash rate by June. Some 28 basis points of tightening are priced in for the next 12 months, down from as much as 52 basis points late last year .
PAIN NOW, GAINS LATER
Queensland accounts for around a fifth of the national economy and more than 80 percent of Australia's coking coal exports, much of which has been hit by the flooding.
Estimates of the drag on economic growth are fluid but analysts see an immediate impact worth 0.5 to 1.0 percent of Australia's A$1.3 trillion in gross domestic product (GDP). Most of that would be concentrated in the current quarter, so it was even possible GDP might contract quarter on quarter.
However, the boost from rebuilding now looks set to be greater than first thought and, coupled with a resumption in coal exports, should see growth accelerate from next quarter.
"The negatives should be up front, while the positives will operate over a longer time frame," said Michael Blythe, chief economist at Commonwealth Bank.
"In aggregate, we expect the floods to have a modest net negative impact equivalent to about 0.2 percent of GDP."
Kate King, a senior economist at St George, noted that Queensland had the third highest levels of employment of the states and enjoyed the fastest jobs growth in the past decade, so the blow to hiring could be sizable in the very short term.
"While labour demand is almost certain to be cut due to the flooding there is a reasonable possibility it will more than recover in the second half of the year due to the clean up and repair of damaged homes and infrastructure," she added.
That meant the shift toward full employment -- generally considered to be a jobless rate of 4.5 to 5.0 percent -- had merely been delayed by a few months.
The RBA will be especially keen to avoid a repeat of 2007 to 2008 when the jobless rate fell steadily to a trough of 4 percent sending annual underlying inflation racing to peak of 4.7 percent, far above its 2 to 3 percent target.
"More (flood) damage to the economy now, means an even larger reconstruction effort, so the expected V-shape of the cycle becomes even more exaggerated," said Stephen Walters, chief economist at JPMorgan.
"This increases the risk that while the RBA will tread carefully in the near term, officials may be pushed into tightening policy more assertively later, as cost and wage pressures build." (Reporting by Wayne Cole; editing by Balazs Koranyi)