Weekly economic briefing: Business Outlook – Jobs now, wages later

The Weekly Economic Briefing is written by two senior Deloitte Economists, David Rumbens from Deloitte Access Economics in Australia and Ian Stewart Deloitte’s Chief Economist in the UK. They provide a personal view on topical financial and economic issues. Subscribe to receive the Weekly Economic Briefing in your inbox!

In this week’s blog:

Australian economic briefing
UK economic briefing
International economic briefing

Australian economic briefing by David Rumbens

This section of the briefing provides a snapshot of key economic data and issues of relevance to Australia.

Business Outlook – Jobs now, wages later

 

The latest release of Deloitte Access Economics’ Business Outlook reports that more of Australia’s recent growth has shown up in jobs rather than in wages.

The latest data from the Australian Bureau of Statistics showed a net gain of around 400,000 jobs in 2017, a 3.3% improvement on the previous year. These gains were driven primarily by the addition of 303,000 full-time positions, reversing the earlier trend which saw job growth led by part-time employment gains through 2016. As a result, the unemployment rate has edged down (averaging 5.5% over the second half of 2017).

To summarise the strength of the labour market:

  • The last time job growth was consistently this good for this long was more than 20 years ago
  • The last time the unemployment rate was this low was back in 2013
  • The last time hours worked was growing this fast was in 2011.

Some of the recent gap between wages and job growth will fade a little through the course of 2018 (see chart 1 below). Yet this change is likely to be slow, meaning that outperformance on the employment front is set to linger. Deloitte Access Economics’ forecasts that employment will grow by 1.5% in the year to December 2018, before slowing to 1.3% in the year to December 2019.

Year-to growth in wages and total employment

Source: Australian Bureau of Statistics; Deloitte Access Economics

Wage growth has been subdued in recent years and remains near record lows. Wages are lower partly due to cyclical factors such as subdued inflation and productivity, but also partly because there has been a structural shift in bargaining power away from workers (think increased global competition in services sectors and automation of work processes).

That said, we should see a return to faster wage growth as the two necessary pre-conditions for a boost in wage gains are already here:

  • Business profits are up
  • Businesses are hiring people at near record levels.

And there is likely to be upward pressure on wages from an increase in the broader inflation rate (measured by the consumer price index (CPI)). A survey conducted by the Reserve Bank found that CPI was a primary determinant of wage-setting for two-fifths of firms.

Demographic factors will also add to wage pressures. Increasing retirement among baby boomers is set to restrain growth in the number of potential workers, and this should hand back some bargaining power to some employees in wage negotiations, contributing to higher wage outcomes.

And lastly, the “income recession” of the post-2011 period has already started to give way to more settled gains in national income. The recent surge in national income was largely driven by higher commodity prices.  And while these are no longer at the levels seen in late 2016 and early 2017, some of the improvement in national income is set to flow through to wages.

Deloitte Access Economics’ forecasts a gradual lift in wage growth – from 2.0% growth in the year to December 2017 to 2.5% in December 2018, followed by gains of 2.7% in the year to December 2019.

All up, the outlook for the Australian economy remains pretty good. Yet neither families nor Canberra’s politicians are likely to get much happier unless and until wage growth finally climbs off the floor. In part that’s because job growth is excellent news for the few, while wage growth is positive news for the many.  Any broadening in the gains from prosperity is therefore keenly awaited.

For more information on the Australian brief, please contact co-authors David Rumbens and Sheraan Underwood.

 

UK economic briefing by Ian Stewart

A personal view from Ian Stewart, Deloitte’s Chief Economist in the UK. Subscribe to and view previous Monday Briefings at: http://blogs.deloitte.co.uk/mondaybriefing/

How distance survived the communication revolution

  • Errors in predicting the future of technology tend to be extreme. At one end are the naysayers, like the Hollywood mogul Darryly Zanuck, who in 1946 predicted that TV would flop, “People will soon get tired of staring at a plywood box every night.” 
  • At the other is understandable mistake of thinking that improvements in the latest hot technology are on an exponential path. Thus the delightful prediction, made by Alex Lewyt, of the Lewyt Vacuum Cleaner Company, in 1955, “Nuclear powered vacuum cleaners will probably be a reality within 10 years”. Four years later the US Post Master General announced that, “Before man reaches the moon, your mail will be delivered within hours from New York to Australia by guided missiles. We stand on the threshold of rocket mail.” 
  • One writer who has got a lot right about technology is the British journalist and economist, Frances Cairncross. Her book, “The Death of Distance – How the Communications Revolution Will Change Our Lives” was published in 1997. In it Ms Cairncross predicted that the cost of transmitting information would fall close to zero making vast amounts of information available instantly. She was also on the money in anticipating the convergence of mobile telephony and the internet. 
  • This may seem unremarkable now but 20 years ago it was heady stuff. Those were the days before Skype and internet phone calls. In 1997 the Chief Executive of the US telco, Qwest, Joseph P Nacchio, remarked that, “Long distance [telephony] is still the most profitable business in America, next to importing illegal cocaine”. 
  • Today communication and data have become vanishingly cheap and widely available. The internet provides communication at zero marginal cost and instant access to vast stocks of information. When the Death of Distance was published there were roughly 10,000 Google searches carried out every day. That figure stands at five billion today. 
  • Like earlier general purpose technologies, such as the internal combustion engine and electricity, the the communication revolution has had profound effects on society and the organisation of work. It has boosted trade and cross border capital flows, enabling people to work anywhere, facilitated growth in off-shoring, outsourcing, self-employment and flexible working. Some effects have been surprising. One of the reasons for the sharp drop in the number of British teenagers holding driving licences is that staying at home is more fun when you have an internet connection and a mobile. Young men aged 17 to 29 today spend 80 minutes more per day at home compared with 1995; women in the same age group spent 40 minutes more a day at home.
  • Yet for all the change wrought by the communication revolution it has not spelled ‘the death of distance’. Indeed, distance and location matter, and in some respects they matter more than ever. 
  • The communication revolution, far from spreading populations and economic growth more evenly within economies, has played out during a period of rapid urbanisation. In emerging and developed nations the movement of population is towards urban areas. The lure of location is stronger than ever. 
  • In 2014, for the first time, more of the world’s population, some 54%, lived in urban than rural areas. The UN forecasts this will rise to 66% by 2050. Businesses remain wedded to city locations. More of the UK’s top companies are headquartered in London than a generation ago. The lead that so-called mega cities, those with populations in excess of 10 million, such as Tokyo and Delhi, have over the rest of the country has increased. 
  • Proximity matters, and for good reasons. Cities offer business a valuable shared pool of resources, particularly labour and infrastructure. Bringing large numbers of people and businesses together increase the chances of matching the right person with the right job. The scale of cities improves matching in other areas, from restaurants to education and the choice of a partner. Scale, in terms of the number of businesses, tend to stimulate competition and productivity.  Nor has technology fulfilled its promise to work equally well everywhere. By and large, technology tends to work better  in urban areas than the country. 
  • Urbanisation facilitates learning and the diffusion of knowledge, two vital processes for the modern economy. Workers in cities can more easily change jobs without changing homes, enabling the transfer of ideas across businesses. On-line learning has supplemented, but shows few signs of usurping the classroom, lecture theatre or face to face contact. Despite the collapsing cost of communication, competition for entry to the best schools and universities has intensified in the last three decades. 
  • For all the transformative effects of the communication revolution the lead that cities have over the rest of the country seems to be widening. The LSE reports that in the UK workers in urban areas earn 8% more than those elsewhere; in London the premium is 24%. Buoyant property prices in major cities underscore the gap. 
  • Human welfare also varies by geography. Last year two US-based academics, Angus Deaton and Anne Case, documented a shocking rise in mortality rates in some areas of rural America. Recent UK research show that life expectancy in some post-industrial and rural areas of the UK had fallen by more than a year since 2011, even as life expectancy continues to rise in London and parts of the south-east. 
  • The communications revolution, has, as Ms Cairncross forecast, caused profound changes in the way we live our lives. 
  • Yet technology only takes you so far, a point that can be illustrated by dating apps and sites. They have revolutionised the business of finding a partner, creating a theoretically efficient way of matching huge numbers of candidates. Anyone, wherever they live, can participate. 
  • But most relationships require proximity, and the benefits of a vast pool of potential partners is most easily realised by being able to meet lots of them – which means being in an urban area. For all the power of the internet, people want to be close to other people. Distance still matters.

 

OUR REVIEW OF LAST WEEK’S NEWS

The UK FTSE100 index ended the week down 0.8%, at 7,666.

US Treasury bond yields continue to rise, while at the same time equities remain near record highs. This suggests investors are expecting rising inflation as a result of increasing economic growth – something that has been largely absent since the global financial crisis.

 

International economic briefing by Ian Stewart

Economics and business

  • The IMF says prospects for the global economy are bright as a result of the broadest synchronised global growth upsurge since 2010 
  • UK GDP growth rose to 0.5% q/q in the fourth quarter, moderately above expectations and marking the fastest rate of growth since fourth quarter 2016 
  • Economist Lord Jim O’Neill argued UK growth forecasts will likely be upgraded thanks to strong global growth, which “dwarfs” possible Brexit effects 
  • UK employment rose by more than expected in the three months to November, easing fears that momentum in the jobs market may be losing steam 
  • WeWork, the flexible office-space provider has become the largest occupier of corporate office space in central London 
  • Economic insecurity in the UK has become the “new normal” with only 30% of respondents saying they “live comfortably”, according to the Royal Society of Arts 
  • Spain’s latest auction of 10-year debt was hugely oversubscribed leading to a 1.4% yield and its narrowest spread against German Bunds in seven years 
  • The four biggest banks in the US reported that credit card losses rose 20% in 2017 
  • The US imposed tariffs on imported washing machines and solar panels, with more such actions expected in the near future 
  • The 11 countries other than the US that agreed the Trans-Pacific Partnership will sign a new agreement later this year 
  • UK households have saved more than they have withdrawn from tax-free ISAs in just two of the previous 20 months 
  • The trade weighted dollar hit a multi-year low after US Treasury secretary Steven Mnuchin commented that a weaker dollar is good for US trade 
  • Eurozone businesses reported their strongest month since 2006 according to a series of January PMI surveys 
  • The value of Australian wine exports to China jumped 63% in 2017 to a post-global financial crisis high, according to Wine Australia 
  • The Guardian reported that armed men broke into a home in Oxfordshire and are believed to have forced the resident at gunpoint to transfer holdings of bitcoin

 

Brexit and European politics

  • Goldman Sachs warned that markets were “complacent” over the upcoming Italian election 
  • Bank of England governor Mark Carney said that the UK had forfeited £10 billion a year in GDP growth since the June 2016 referendum, The Times reports 
  • A CBI survey found that 60 per cent of UK companies have either implemented contingency plans to cope with Britain leaving the EU without a deal or intend to do so 
  • UK chancellor Philip Hammond called for a soft Brexit with “very modest” changes to the UK’s relationship with the EU, reports the FT 
  • France will hire 95 extra customs officials this year to help cope with the consequences of Brexit 
  • Germany’s Social Democrats voted to enter formal coalition talks with Angela Merkel’s Conservatives, overcoming an important hurdle in forming a government 
  • Lloyds Bank has applied to make its Berlin branch a subsidiary by the end of the year, in order to continue its operations in the EU unaffected by Brexit 
  • JP Morgan boss Jamie Dimon warned that the firm could move more than 4,000 jobs from the UK if Brexit negotiations go badly 
  • The EU Parliament’s Brexit coordinator, Guy Verhofstadt, warned that the freedom of movement rules must continue to apply in Britain during the Brexit transition period and until 2021 
  • An unanticipated credit to the UK from the EU in December sent UK government borrowing in the month down to its lowest in 17 years

And finally…

Britain’s first cyborg shopping assistant was sacked after just a week on the job. Fabio, a trial ‘ShopBot’, was relieved of his duties after confusing and angering customers with unhelpful advice such as telling those seeking beer that it was “in the alcohol aisle” – the chopBot


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