Outlook for Australian labour market

Chief Economist's view

 

The global economy underwent a remarkable period of synchronised growth over 2017. Although there is some fading in momentum of the stellar performance of last year, 2018 shapes up to be another strong year of broad-based growth across the global economy.

Notwithstanding a positive outlook for business investment, international exports and government infrastructure expenditure, the outlook for the Australian economy is muted, overshadowed by the prospect of a sharp slowdown in the housing market and sluggish consumer spending. The May release of forecasters expectations for the Australian economy by Consensus Economics shows a modest pick-up in real GDP growth from 2.3% in 2017 to a just-on-trend rate of growth of 2.7% in 2018.

The outlook for consumer spending in the Consensus Economics survey of professional forecasters is gloomy, with expectations of a fall in growth from a trend rate of 2.7% in 2017, to below-trend rates of 2.5% and 2.4% in 2018 and 2019, respectively. This is despite expectations of strong employment growth, as implied by the drop in the unemployment rate from 5.6% (on average) over 2017, to 5.4% this year to 5.2% over 2019.

The main reason for the modest outlook for consumer spending is weak wage growth. The Consensus Economics survey shows that forecasters are anticipating annual average wage growth of just 2.2% in 2018, rising modestly to 2.3% in 2019, over a percentage point below the rate of wage growth we would expect if the unemployment rate were at its sustainable level of 5.0%.

Of course, the unemployment rate is likely to remain above 5.0% even into 2019, as in the Consensus Economics survey, if economic growth remains at the lacklustre trend rate of around 2.75% over the coming two years. However, if history were our guide, at unemployment rates below 5.5%, we could expect wage growth closer to 3.0% than 2.0%.

Why has wage growth been so sluggish? Looking at labour market data over recent years, the unemployment rate began to subside around the last quarter of 2015. Historically, it takes around one year for changes in the unemployment rate to pass fully into wage growth. Consistent with historical experience, wage growth (as measured by the Wage Price Index (WPI)) troughed in the September quarter of 2016 at a yearly rate of 1.9%.

From 2015 to 2016, the unemployment rate fell steadily from 6.3% to around 5.7% (not too distant from its current rate of 5.6%) and we have seen modest improvement in wage growth from 1.9% to 2.1%. However, the fall in the unemployment rate has stalled since 2016, despite a pickup in employment growth from an annual rate of less than 1% in the December quarter of 2016 to an annual rate of around 3% currently.

We know, of course, that the stall in the unemployment rate has been due to the sharp rise in the labour force participation rate over the same period, which increased from around 64.5% in the December quarter of 2016 to its current level of 65.6%, meaning that job creation has been matched by new job seekers.

The increase in the participation rate has come from two sources: females within the 15-64 year age group and males above 64 years. The increase in female participation reflects increased spending on health (particularly the roll out of the NDIS), which has boosted employment in female dominated occupations such as nursing.

The increased participation rate in older male workers reflects baby boomers extending their time in the workforce as they attempt to accumulate enough savings to last into an extended life cycle. These two shifts in worker behaviour are drawing closer to an end and as the participation rate stabilises, the unemployment rate will once again begin to decline.

As the unemployment rate declines, wage growth will continue its grind higher. Already we are seeing businesses beginning to increase bonus payments, the first stage in the typical cycle of renewed wage growth. Our view is that the unemployment rate will fall over the remainder of 2018 and 2019, in-line with Consensus Economics, reaching an average of 5.2% in 2019. Unlike the median Consensus Economics forecast of 2.4%, we expect wage growth to climb to an average annual rate of 2.7% in 2019, heading to a year-ended annual growth rate of 2.9% and a brighter outlook for growth in household incomes.

Table 1: Financial market movements, 10 - 17 May 2018

Equity index

Level

Change

10-yr government bond

Yield

Change

Foreign exchange

Rate

Change

S&P 500

2,720.1

-0.1%

US

3.11%

14.9 bps

US Dollar Index (DXY)

93.47

0.9%

Nikkei 225

22,838.4

1.5%

Japan

0.06%

1.0 bps

USD-JPY

110.77

1.3%

FTSE 100

7,788.0

1.1%

UK

1.56%

13.3 bps

GBP-USD

1.352

0.0%

DAX

13,114.6

0.7%

Germany

0.64%

8.3 bps

EUR-USD

1.180

-1.0%

S&P/ASX 200

6,094.3

-0.4%

Australia

2.92%

14.8 bps

AUD-USD

0.751

-0.3%

Source: Bloomberg

 For the economic update by region, click here.

 

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