Weekly economic briefing: A strong jobs market, with wages playing catch-up

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.

A strong jobs market, with wages playing catch-up

The latest ABS jobs data indicates continuing strength in the Australian labour market in October. In seasonally adjusted terms, the number of employed people increased by 32,800 in the month, while the unemployment rate remained at 5.0% in October (the lowest level since 2012, and around the conventional measure of ‘full employment’ in Australia).

Indeed, the Australian labour market has performed well in 2018. So far this year, 308,000 jobs have been added – significantly higher than the 201,000 increase in the number of working age people. This strength in jobs growth has contributed to the declines observed in the unemployment rate.

So, this is all good news. And there are also signs of life on the wages front.

While the latest data shows that wage growth remains low, thanks to a tightening labour market it is clearly picking up. Wages growth edged up to 2.3% per annum in the September quarter, up from the record-low 1.9% seen in late 2016.

Chart 1: Wages growth versus underutilisation rate
Source: Australian Bureau of Statistics
Note: The ‘underutilisation rate’ refers to the sum of the number of people unemployed and the number of people underemployed, as a proportion of the labour force.

Even so, overall wages growth remains relatively weak compared to longer-term historical averages. Part of the reason for this is that the unemployment rate hasn’t been capturing the full extent of spare capacity in the labour market. The underemployment rate (which measures those employed but seeking to work more hours) has edged down to 8.3%, but still remains relatively high.

Chart 2: Underemployment rates by age group
Source: Australian Bureau of Statistics

As Chart 2 shows, continuing underemployment is particularly an issue for younger and older workers. For mid-aged workers (35–54 years), underemployment rates have declined, and are not far above those seen in the mid-2000s. In other words, in some segments of the market, spare capacity is dissipating – and that’s a good sign for a further pickup in wages growth.

The experience of other countries has also been one of an extended period of very subdued wages growth despite tightening labour markets. That said, there are now signs that wages growth is strengthening overseas as well, as unemployment rates in some countries reach very low levels. For example, US wages growth has picked up from a low of below 2% to around 3% now (stronger, but still fairly low), with the unemployment rate reaching a multi-decade low of just 3.7%. Wages in the Eurozone are also rising at their fastest pace in six years, driven by a tightening labour market.

This international evidence suggests that, while the response of wage growth to unemployment rates may currently be weaker than it used to be, wage growth will indeed continue to pick up as spare capacity in the labour market dries up further.

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

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/

Learning to live with slower Chinese growth

  • In time, breakneck growth in the early stages of industrialisation gives way to slower growth. All industrialised nations experience this change as a manufacturing boom fuelled by cheap labour runs its course.
  • China has been going through just such a transition. China’s growth rate peaked at just over 14% in 2007. Since then it has slowed. Today China’s trend growth rate seems to be somewhere in the region of 5% to 6% a year.
  • In recent years the Chinese authorities have played a role in the slowdown by reining in credit growth and investment spending. The dampening effects of tighter domestic policy have, in the last year, been reinforced by trade tensions with the US and higher American interest rates.
  • The US has imposed tariffs on roughly half of Chinese exports to the US and has threatened to put tariffs on the rest. Meanwhile the lure of higher US interest rates has sucked capital out of China and back to America.
  • Equity markets were ahead of the game in spotting the slowdown. Chinese stocks have fallen 30% from their January peak.
  • Growth in Chinese credit, retail sales and infrastructure spending have dropped off in recent months. Car sales have been especially hard hit by the imposition of retaliatory tariffs by the Chinese authorities. Over the summer Chinese car sales were growing at 10% year on year. Now they are contracting by around 10% year on year.
  • In the year to the third quarter the Chinese economy expanded at the slowest rate in ten years.
  • The pace of the slowdown has taken the Chinese government by surprise and it has reacted by easing policy.
  • China’s central bank has cut banks’ reserve ratio requirement three times this year and injected cash into the system, pushing interest rates lower. The Renminbi has been allowed to drift lower in an attempt to boost exports. Income tax cuts, due to take effect next January, are designed to boost flagging consumer spending. Local officials have been told to accelerate infrastructure spending.
  • The general view is that these measures will help China engineer a soft landing. The International Monetary Fund forecasts that China will grow by about 6% a year over the next five years.
  • This is just over half the growth rate of the 1990s and early 2000s. But by Western standards a 6% growth rate is enviable. And at this rate of growth the Chinese economy would double in size every 12 years. Crucially, a move to lower trend growth could lead to a beneficial rebalancing of the Chinese economy.
  • Slower Chinese growth would help reduce excess capacity and create a more efficient, market-based allocation of capital. That, in turn, would rein in credit growth and speculative development (it is a sobering thought that, according to a recent estimate, one-fifth of China’s urban housing stock or roughly 50 million apartments is unoccupied).
  • Investment accounts for 42% of Chinese GDP, twice US levels. Shrinking this outsize share of the economy would create space for consumer spending, especially in welfare- enhancing spending on services such as health and leisure.
  • In the early stages of industrialisation growth is driven by channelling cheap labour and capital into the economy. Now China’s workforce is shrinking and labour costs are rising fast. China’s advantage as a low-cost manufacturing hub has been eroded. And while cheap and abundant capital fuelled growth it also created excess capacity, propped up lame ducks and added to bank debt.
  • The Chinese government wants to create a more productive, high-tech economy. They do not lack ambition. The Made in China 2025 strategy, launched in 2015, identifies ten sectors, including robotics and semiconductors, where the government wants Chinese companies to dominate at home and compete globally.
  • The transition to a lower growth China is not without risks. Economists have long fretted about the risks posed by poor quality lending, inflated asset prices and the accumulation of debt. Economic frailties which are manageable in the good times can be cruelly exposed as growth slows.
  • Everyone agrees that the days of 10% a year growth for China are over. The real question is whether the transition to slower trend growth can be achieved smoothly. That will require skill on the part of policymakers – and plenty of luck.

PS – I was in Washington last week for Deloitte’s annual conference for US Chief Financial Officers. Last year the mood was upbeat, helped by a gathering US recovery and the hope of tax cuts. This year the mood was more cautious. One revealing polling question showed that the CFOs see protectionism as posing by far the biggest threat to North American growth next year.

OUR REVIEW OF LAST WEEK’S NEWS

The FTSE 100 ended the week down 1.1% at 7,029. UK shares and assets fell amidst criticism of the EU-UK draft Withdrawal Agreement, the resignations of two Cabinet ministers and the risk of a challenge to the Prime Minister from within her own party. Sterling suffered its sharpest one-day sell off since the Brexit referendum result in 2016.

International economic briefing by Ian Stewart

Economics and business

  • Japan and Germany, the world’s third and fourth largest economies, contracted in Q3 by 1.2% and 0.2% respectively
  • Paul Tudor Jones, one of the world’s leading hedge fund managers, warned that excesses in the corporate debt market could trigger another financial crisis
  • UK retail sales fell at a faster than expected rate in October
  • UK wages grew at 3.2% in the three months to September, the fastest pace in nearly a decade
  • China and Canada are in talks for a bilateral free trade deal
  • The Italian government defied calls from the EU to reverse its plans to sharply increase public spending in its resubmitted 2019 budget
  • The number of EU nationals working in the UK fell in Q3 at its fastest rate since records began in 1997
  • The UK has lost two-thirds of its bank branches in the past 30 years, according to research by Which?
  • The price of oil fell to an eight-month low last Tuesday over concerns that a global slowdown will hit demand
  • HSBC announced that it is planning to re-enter the Brazilian market three years after closing most operations there
  • In a research report Goldman Sachs notes that electric cars require only two-thirds of the parts of a conventional car
  • Netflix launched trials of a lower-cost streaming plan for mobiles in Malaysia as it looks to expand into emerging Asia
  • British artist David Hockney’s painting “Portrait of an Artist (Pool with Two Figures)” sold for $90.3m, the highest ever for a living artist

Brexit and European politics

  • UK and EU negotiators published the draft Brexit Withdrawal Agreement after agreeing on the legal text for the Irish backstop section
  • Two prominent UK Cabinet ministers, Dominic Raab and Esther McVey, resigned over concerns that the Brexit deal “threatens the integrity of the UK union”
  • Conservative MP, Jacob Rees-Mogg, submitted a letter of no confidence in Theresa May to the party’s influential 1922 Committee which has the authority to hold a leadership contest
  • UK Brexiters Michael Gove and Liam Fox reiterated their support for UK prime minister Theresa May
  • EU leaders have rejected the prospect of restarting Brexit negotiations, amidst criticism of the Withdrawal Agreement in the UK
  • European Council president, Donald Tusk, confirmed that an EU summit will be held on November 25 “in order to finalise and formalise the Brexit agreement”
  • Michael Barnier, the EU’s chief Brexit negotiator, said on Sunday that the EU could extend the UK’s transition out of the bloc until as late as December 2022. This would ease the transition but would maintain free movement of people and payments to the EU beyond the next election
  • The IMF estimated that a no-deal Brexit scenario, compared to the UK staying in the EU, would result in GDP around 6% lower over the long-term
  • EU citizens will be able to enter the UK via the Republic of Ireland and Northern Ireland without mandatory passport checks after Brexit
  • Angela Merkel backed Emmanuel Macron’s call for the creation of a European army

And finally…

  • Tanzanian President John Magufuli sacked both his agriculture and trade ministers for having failed to arrest a fall in the price of cashew nuts, a major export commodity – unfortunut exit

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