Cliff’s Notes: Historic Labor Market Strength Leads to Rising Wage Pressure
Key insights from the week that has been.
After a very strong run, the Australian labor market took a breather in April, with just 4,000 jobs created during the month (market consensus 30,000). Still, the jobless rate hit a new nearly 50-year low at 3.9% (note, March was also revised down to 3.9%). Further underscoring the current strength in labor demand, hours worked rose 1.3% during the month as part-time positions moved to full-time and more full-time positions have been created.
Going forward, we continue to expect further strong employment gains, leading to a low of 3.2% in the unemployment rate at the end of this year despite record participation. As this trend persists, the wage pulse is expected to strengthen from a modest 2.4% pa in Q1 2022 to 4.0% pa in 2023. The Q1 WPI detail supports this point. view, with the 15% of private workers who received a raise in the quarter seeing their wages increase by 3.4%, a full percentage point above the current annual rate and the biggest increase since June 2013. decision on the 2022 minimum wage could provide additional support, with unions presenting an ambitious 5.5% demand. %.
Minutes from the RBA’s May meeting provided further evidence of their work to liaise with businesses on the strength of the labor market and growing wage dynamics. Also important for the inflation outlook, companies indicated that they were increasingly confident in rising prices.
As Chief Economist Bill Evans has detailed, the current inflation dynamics and uncertainty surrounding the outlook suggest that the most appropriate path for policy is a moderate upside cycle but preloaded from the current level of 0. .35% (after the 25 basis point increase in May) to 0.75% in June; 1.75% in November; and a peak of 2.25% by May 2023. The high level of Australian household indebtedness will then see debt service peaks until the GFC, affecting both discretionary income and sentiment.
In New Zealand, this week saw the release of our team’s latest quarterly economic overview, a detailed assessment of current conditions and the outlook for the New Zealand economy. In the release, the team raised its expectations for the RBNZ, with a maximum cash rate of 3.50% now seen at the end of the year to combat a powerful combination of global and local inflationary pressures. Home sales and prices have already taken a hit and are expected to weaken further as the cycle continues. That said, the cumulative decline should only bring prices back to the level seen at the start of 2021. Through confidence and wealth, this shock should trickle down to consumption and GDP growth in time, creating the slowdown. needed to ease inflationary pressures and risks. Recognizing the impact on household incomes, the New Zealand government’s 2022 budget has provided temporary and targeted relief in the cost of living.
For the United States, FOMC speakers, including Chairman Powell, again emphasized this week that, for now, inflationary pressures and risks remain top of mind. Concerns about the strength and persistence of inflation in the UK and the Eurozone meanwhile had a broad impact, with global equities hit hard by fears of stagflation.
We believe it is important to distinguish between the risk of above-target but decelerating inflation with activity growing close to trend, and the risk of an economy stalling or contracting with inflation a multiple of the target (stagflation).
Our baseline forecast for the United States calls for slightly below-trend GDP growth in 2023; but, throughout this year, inflation is expected to slow to just over 2.0% per year. Achieving this feat in the United States requires energy price growth to slow, not fall sharply, and other supply-side price pressures to return from extreme levels to a moderate positive pace – a process that has clearly defined it but still has a long way to go. Course.
As President Powell pointed out this week, it is not enough to believe that this trend will run its course. Instead, the strength of demand must be actively contained by financial conditions and real household incomes. Nor does it mean that central banks should completely halt growth and risk recession. In the United States and in most developed countries, there is a clear belief in moving quickly to shift policy and tighten financial conditions towards a neutral level, but adopting a purely restrictive stance only if the risks materialize. Concerns about growth prospects should therefore be viewed as a function of market behavior and uncertainty, not central bank actions.
Finally to the events in China. Last week’s data headlines raised considerable concern about the economic outlook, far more than the detailed data suggests. The biggest concern was retail sales, which were reportedly down 11% in April from a year ago. However, assessed on an annual basis, the 2022 cost to consumption of COVID-zero policies is considered much more manageable, with activity down only 0.2% in the first four months of 2022 compared to the same period in 2021. It’s also important to note that year-to-date growth in fixed asset investment largely held steady in April, with the tight geographic focus of shutdowns helping to sustain activity elsewhere.
If the success in controlling the spread of the virus in Shanghai and Beijing continues, the recovery should be quick and significant. In support of this view, the past month has seen the authorities’ support for the economy continue to strengthen through announced and discussed policy initiatives, and by encouraging the availability of credit/borrowing. This does not mean that we will see an increase in all projects, regardless of their profitability; but rather that local government and state-owned enterprise-curated lists of productivity-enhancing infrastructure projects in the old and new economy are given the green light. At the same time, with the residential construction sector having completed its reform phase and given the recently announced policy easing, confidence should return among buyers and builders in the second half of 2022, supporting a strong recovery in the economy. activity.
Obviously, as long as it is active globally, COVID-19 will remain a risk for China. But maintaining heavy restrictions on international travel should reassure authorities that the domestic economy can reopen and function with limited risks. This approach to COVID-zero would offer a double win for GDP, limiting the loss of imports while building momentum and confidence in local activity. This is key support for our view that GDP can still grow close to the authorities’ 2022 target despite a weak Q2. Besides the virus, the other significant risk to Chinese growth is external demand which is under pressure from tighter financial conditions, weakening real incomes and, of course, uncertainty.