Could there finally be a sniff of latent wage growth in the air?
This week in finance:
- Bank and financial services royal commission (Monday-Friday)
- House prices: ABS quarterly data (Tuesday)
- TPG annual results (Tuesday)
Last week’s stronger than expected jobs figures certainly showed encouraging signs.
The underutilisation rate — the sum of unemployment and underemployment, or people looking for more work — edged down to 13.4 per cent, a five-year low.
Underutilisation is one of the better guides to slackness in the labour force, and therefore a reasonable leading indicator on wages.
Just what would be a good rate of wage growth is open to question, but to kick off the argument one may as well take the Reserve Bank’s “not-too-hot-not-too-cold” aspiration.
RBA governor Philip Lowe has suggested wage growth starting “with a 3 rather than a 2” would be the shot.
That would help edge inflation up, and allow the RBA to move interest rates up from the current emergency setting.
Wages are currently growing at 2.1 per cent, still well short of the RBA’s ideal.
Labour market capacity vs wages
Wage growth maybe next year
“For wage growth to reach the RBA’s lower bar of 3 per cent, the underutilisation rate would need to fall to 13.2 per cent,” said Paul Dales of Capital Economics.
“The current trend suggests that could happen by early next year.
“Given that the underutilisation rate tends to lead wage growth by about six months, wage growth could then rise to 3 per cent late next year.”
But there are still two significant forces keeping a lid on things, driving employment “slackness” and low wages; Australia’s strong population growth and the high levels of participation in the jobs market.
Alex Joiner, an economist at big superannuation investment manager IFM, makes an interesting comparison between the US and Australian economies.
Dr Joiner says Australia is “out-growing” the seemingly more robust US economy on a number of fronts. Despite this, unemployment remains stubbornly high.
Alex Joiner tweet: That said, if employment growth should slow to say 10.0K per month there could be a material rise in the unemployment rate should the participation rate not fall – in short the #RBA will be hoping yesterday’s employment weakness isn’t repeated to often going forward #ausbiz
“The Australian economy is going quite well. There are more people in Australia, more people want a job,” Dr Joiner said.
The participation rate is sitting at a record high, largely driven by more women than ever either in work, or looking for work.
Population growth is driving the economy — 1.6 per cent, or around half GDP growth’s 3.4 per cent, is population growth.
Population growth also represents around two-thirds of the boomtime growth in jobs.
Put the potent mix of population growth and a population keen for work together and you get an unemployment rate that stays elevated.
Indeed Australia is very much out of sync with other developed economies on the unemployment front.
It is almost alone in having a much higher rate of unemployment now than a decade ago. Most have lower rates.
In August 2008, Australia’s unemployment was 4 per cent compared to 5.3 per cent now. Over the same period, US unemployment has gone from 6.1 per cent to 3.9 per cent.
The last time the US saw unemployment this low was at the turn of the century. For the UK, it was back in 1975.
Despite unemployment falling to multi-decade lows, wage growth in the US and UK is also still pretty sluggish.
So these days, even full employment is seemingly no guarantee of strong wage growth.
Australian unemployment vs other developed economies
“Australia will need to get unemployment below 5 per cent to get wage growth to pick up,” Dr Joiner said.
The RBA has 5 per cent pencilled in for 2020.
And this where it cuts both ways for the RBA.
If Australia had lower population growth, it would have lower unemployment and higher wages.
That would in turn make easier to get back to the preferred 2-to-3 per cent target band, halt the rapid erosion of household savings and increase consumption.
Chart of the day: Components of population growth
However, the RBA and Dr Lowe are unabashed supporters of high population growth.
As the population clock ticked over 25 million last Month, Dr Lowe made a strong defence of immigration bullet-proofing the economy.
“This is an important difference, with Australia’s faster population growth being one of the reasons our economy has experienced higher average growth than many other advanced economies,” Dr Lowe said.
So while the dip in the utilisation rate may indicate the jobs market is finally making some headway in dealing with a growing population, the state of Australia’s crowded roads, public transport, hospitals and schools would tend to indicate public policy still isn’t.
Wall Street traders probably should have not bothered to turn up to work on Friday to mark the 10th anniversary of the Lehman Brothers collapse.
History didn’t repeat. Stocks went nowhere.
There was a listless sort of rotation into safe-haven US bonds, which saw yields slip a bit as trade fears outweighed a generally rosy economic picture. However, over the week yields generally rose.
Europe had a better end of the week, buoyed by Turkey’s aggressive 6.5 percentage point interest rate rise. It’s now 24 per cent, although a fair way behind club house leader Argentina’s 60 per cent.
Over the week, equities were generally stronger, the US and Europe rose 1.2 per cent and 1.4 per cent. The ASX lagged, putting on 0.4 per cent and China lost more than 1 per cent.
The ASX looks like going nowhere much when it opens on Monday and the Australian dollar’s slide appears arrested for now on the back of last week’s positive employment data and a marginally weaker greenback.
Markets on Friday’s close:
- ASX SPI 200 futures +0.1pc at 6,180 ASX 200 (Friday’s close) +0.6pc at 6,165
- AUD: 71.5 US cents, 61.5 euro cents, 54.7 British pence, 80.1 Japanese yen, $NZ1.09
- US: Dow Jones flat at 26,155 S&P500 flat at 2,905 NASDAQ -0.1 at 8,010
- Europe: FTSE +0.3pc at 7,304 DAX +0.6pc at 12,124 EuroStoxx50 +0.3pc at 3,345
- Commodities: Brent oil +0.4pc at $US78.09/barrel, Gold -0.6pc at $US1193/ounce, Iron ore +0.3pc $US67.86/tonne
After a couple of blockbuster weeks, the finance diary looks a bit dull.
The US is expected to enforce the next step up in tariffs to include another $US267 billion worth of imports, on top of the already $US250 billion in place.
Obviously that takes the total target to $515 billion, which curiously exceeds the total $505 billion imported last year.
Domestically, a seat at the financial services royal commission looks by far the most interesting thing this week.
The current storylines in the insurance industry are harrowing and compelling.
It is a lay-down misere that Commissioner Kenneth Hayne will be invited to consider criminal charges against a number of life and general insurers at week’s end.
The ABS releases its home price data (Tuesday), but it will only confirm what is known from the more timely CoreLogic figures. House prices are falling.
|Financial services royal commission||Inquiry continues to look at the extraordinary misconduct in the insurance industry|
|House prices||Q2: ABS residential price index, forecast to be down 1pc, after a similar sized fall in Q1|
|RBA minutes||Minutes from September meeting unlikely to say anything the RBA hasn’t already said|
|TPG FY profit||Underlying earnings around $420m, but most interest will be on further details on planned Vodafone merger|
|RBA speech||Assistant governor Christopher Kent speaks|
|Population||Q1: A detailed look at Australia’s still rapidly growing population|
|Labour market||Q2: More detailed breakdown of jobs across the sectors|
|Business sales||Aug: CBA data, a look at spending across the economy|
|Suncorp AGM||A really bad week for insurers given the Royal Commission’s focus. Shareholders could ask some curly questions too|
|EU: Inflation||Aug: Core inflation still stuck at around 1pc YOY|
|US: Housing starts & home loans||Aug: US housing market has been softening|
|EU: ECB speech||ECB president Mario Draghi speaks in Berlin|
|EU: Consumer confidence||Sep: Likely to slip further into negative territory|
|JP: BoJ interest rate meeting||No change|
|EU: Manufacturing survey||Sep: PMI’s still in expansion territory, but slowing|
|US: Manufacturing survey||Sep: PMI expanding, but focus will be on export orders as trade dispute heats up|