Australian Markets Weekly: 26 March 2018

Breaking down RBA research on wages.

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Overview

  • In its March Bulletin, the RBA published analysis that throws more light on why wage growth has remained low, even after taking into account a (modest) tightening of the labour market. While this puzzle has led some to believe the Phillips Curve is dead, the RBA finds that the Phillips Curve still explains recent wage trends, with the relationship between unemployment and wages remaining robust overall.
  • That said, the RBA finds that the current softness in wage growth partly reflects structural factors that have been important in recent years. The Bank points to an advanced economy wages “overhang” persisting after the GFC – as wages were not cut by as much as economic conditions warranted during the Crisis. In addition, a decline in employee bargaining power/lower unionisation, also evident across advanced economies, has been providing a structural drag on wages.
  • The RBA’s main finding – and also embodied in their forecasts for wages and inflation – is that wages will ultimately respond to the tightening labour market, although wage growth will likely only lift gradually in the face of these structural headwinds, and evidence of increased wage stickiness.
  • Ahead of Easter, this week will be quiet data-wise for Australia. Two pieces of data worth looking into are RBA Credit and ABS Job Vacancies, both published on Thursday. It will be interesting if Job Vacancies also reports the improved labour demand that other measures are showing, although, given the continued jobs growth in the Labour Force data, it’s not so much labour demand that’s in any near term doubt. Rather, it’s the increase in labour supply, buoyed by fast population growth and job seekers returning to the labour market. These factors are limiting the decline in spare labour market capacity.
  • Offshore, there will be ongoing interest in tariff and trade news following recent escalation of protectionism in the US. Fed speakers are due to re-appear with the FOMC out of the way, with most data interest in the US likely to be PCE deflators and Consumer Spending report, out Thursday. China releases its official PMIs, on Friday when many markets are closed for Easter. It will be important to see some recovery from February.
  • In markets, geopolitics and tariffs/trade war fears continue to take centre stage, with equity markets still on the defensive. AUD/USD closed (just) below 0.77 for the third time this week (and year) on Friday, despite the weak US dollar backdrop. NAB continues to look for a modestly lower $A through the remainder of 2018 (ending around US$0.75) and for the RBA to begin to raise rates later in the year.
  • There will be no Weekly next week for Easter Monday. Look forward to our next report on Monday 9 April.

For further details, please see the attached document: