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    The economy continues to be stuck with a relatively high level of labour market slack and sluggish wage growth.  The unemployment rate rose to 5.3 per cent in January while the underemployment rate climbed to 8.6 per cent. 


    The wage price index grew by just 2.2 per cent over the year to the December 2019 quarter with only one industry managing to generate growth above three per cent.  This week’s readings include insights on Australia’s productivity performance, a detailed look at Australian business investment in innovation, the IMF’s latest take on global risks, more on the economic fallout from Covid-19, and the OECD on the global corporate bond market. 

    What I’ve been following in Australia . . . 

    What happened:  

    According to the ABS, the unemployment rate rose to 5.3 per cent in January on a seasonally adjusted basis, up from 5.1 per cent in December.  On a trend basis, there was no change, with the unemployment rate stuck at 5.2 per cent. 

    Unemployment rate

    The underemployment rate (seasonally adjusted) also increased in January, rising to 8.6 per cent from 8.3 per cent in December. As a result, the underutilisation rate has now climbed to 13.9 per cent from 13.4 per cent at the end of last year, reaching its highest level since June 2018.

    Unemployment and underemployment

    The participation rate increased marginally, rising from 66 per cent in December to 66.1 per cent in January, while the employment to population ratio was unchanged at 62.6 per cent.

    Participation and employment to population ratio

    By state, the seasonally adjusted unemployment rate increased by 0.6 percentage points in Queensland, climbing to 6.3 per cent, and was up by 0.4 percentage points in both Victoria (to 5.4 per cent) and Tasmania (to 5.9 per cent), with no change in New South Wales. The unemployment rate decreased in South Australia (down 0.5 percentage points to 5.7 per cent).

    Unemployment rate by state

    Seasonally adjusted employment increased by 13,500 people in January 2020, comprising a large increase of 46,200 people in full-time employment and a fall of 32,700 people in part-time employment. Over the year to January, full-time employment increased by 143,900 people, while part-time employment rose by 103,500 people.  

    Monthly change in employment

    Why it matters: 

    Markets had expected the unemployment rate to rise to 5.2 per cent in January and employment to grow by about 10,000 people.  But the accompanying lift in the participation rate meant that although employment growth beat expectations, the unemployment rate nevertheless rose to 5.3 per cent.  And with underemployment also increasing in January, the overall picture was of a labour market that continues to be characterised by plenty of slack – even though the economy did add the highest number of full-time jobs since January 2019. 

    Last week’s piece noted that February’s Statement on Monetary Policy set out the RBA’s conditions for another cut in the cash rate, expounding that ‘if the unemployment rate were to be moving materially higher and there was no further progress being made towards the inflation target, the balance of arguments would tilt towards a further easing of monetary policy.’  One month’s increase in the unemployment rate might not be enough to meet these criteria, but with the start of the economic fallout from Covid-19 still to be felt in the upcoming February and March monthly labour market reports, there’s now a good chance that the pressure on monetary policy will mount over the coming months. 

    What happened:  

    The ABS reported that the wage price index (WPI) rose 0.5 per cent over the December quarter (seasonally adjusted) and was up 2.2 per cent over the year. 

    Wage price index

    Annual wage growth in the private sector was unchanged at 2.2 per cent while growth in the public sector fell to 2.2 per cent.  That was the slowest pace of annual growth for the public sector since the ABS started compiling the WPI. 

    By state, Victoria saw the highest overall annual growth in the WPI at 2.7 per cent, while Western Australia recorded the lowest growth (1.7 per cent) for a sixth consecutive quarter. 

    Wage price index by state

    By industry, wage growth was strongest in the health care and social assistance sector (up 3.1 per cent over the year) and the utilities sector (up 2.9 per cent).  Growth was below two per cent in the education and training, administration and support services, construction, manufacturing, retail, and information, media and telecommunications sectors, with the last on that list experiencing the slowest wage growth (just 1.6 per cent). 

    Wage price index by industry

    Why it matters: 

    While the headline growth rate in the WPI was unchanged at 2.2 per cent and in line with market expectations, public sector wage growth fell for a second consecutive quarter.  Moreover, only one industry managed to generate wage growth in excess of three per cent.  Granted, with headline inflation running at 1.8 per cent in the December quarter, real wage growth is still in positive territory - but only just.   

    Weak wage growth (and hence subdued household consumption) has been a key theme over the past year, so the key point here is that the fourth quarter numbers showed no signs of any relief for the wage stagnation syndrome.  And with no evidence yet of any significant decline in labour market slack (see previous story), lacklustre wage growth and therefore limited inflationary pressure look set to continue. 

    What happened:  

    The RBA published the minutes of the 4 February board meeting. 

    On the international front, the key risk that has developed since the start of the month has been the impact of Covid-19 and the growing fallout for the global economy.  Back in early February, information was still relatively scarce, and the Board discussion reflects this, reporting that: 

     ‘While it was too early to tell what the overall effect would be, the outbreak presented a material near-term risk to the economic outlook for China and for international trade flows, and thereby the Australian economy.’ 

    In the case of the domestic economy, Board members felt that: 

     ‘The outlook for the Australian economy was for growth to improve, supported by a turnaround in mining investment and, further out, dwelling investment and consumption. In the short term, the effects of the bushfires were temporarily weighing on domestic growth, but the recovery was likely to reverse the negative effects on GDP by the end of the year.’ 

    The minutes conclude: 

    ‘The Board would continue to monitor developments carefully, including in the labour market, and remained prepared to ease monetary policy further if needed to support sustainable growth in the economy, full employment and the achievement of the inflation target over time.’ 

    Why it matters: 

    There’s little additional insight on the RBA’s thinking to be derived from February’s minutes.  As we noted after the meeting itself, the RBA was in watch and wait mode, but still cautiously anticipating a somewhat stronger year ahead.  While it’s still early days, the economic dislocations already triggered by Covid-19 suggest that the near-term outlook is now significantly weaker than it was only a few weeks ago, which seem likely to have dented that optimism at least a little.   

    That said, the longer-term economic implications remain difficult to judge at this point, dependent as they are on the future trajectory of the disease.  So it’s possible, for example, that the near-term weakness now set to drag down the global and Australian economies in the first quarter of this year could yet be offset by policy stimulus from Beijing and beyond, which could then deliver a bounce back in the second half, assuming that by then the virus is contained and the worst of the effects have started to fade.  Of course, more negative scenarios are also possible (on this, see also the discussion on the IMF’s G-20 surveillance note in this week’s readings, below). 

    What I’ve been reading 

    The Productivity Commission (PC) has released the latest in its Productivity Insights series.  The report highlights the fact that labour productivity (down 0.2 per cent) and multifactor productivity (down 0.4 per cent) in the market sector both fell in 2018-19, with the latter marking the first decline in multifactor productivity since the peak of the mining boom in 2011.  Most of the decline in labour productivity growth in recent years has been a product of a weaker multifactor productivity performance, along with a small contribution from a slowdown in capital deepening.

      The PC also highlights three key sectoral trends behind the slowdown in labour productivity since 2005: (1) the decline in productivity growth slowdown has varied significantly by industry; (2) reallocation of labour between industries has been an important driver of overall productivity performance; and (3) slower labour productivity growth in just three industries (manufacturing, agriculture and the utilities) together explains about 90 per cent of the overall slowdown in productivity performance over this period.  The report also looks at why wage growth in Australia has stagnated since 2012-13,  allocating the blame to slower productivity growth (which explains over half of the fall in consumer wage growth) along with the faster pace of consumer inflation relative to producer inflation (a further quarter of the decline) and a fall in the labour share of income (about a fifth). 

    Innovation and Science Australia have produced a new report on Stimulating business investment in innovation.  There are also supporting reports from AlphaBeta looking at trends and drivers in innovation investment, and from Nous on policy options.  

    ANZ’s Stateometer reports substantial downgrades to its forecasts for gross state product growth in New South Wales, Victoria and South Australia. 

    The NAB on Australian wellbeing.  According to their Index, after rising through the first three quarters of last year, wellbeing declined in the final quarter of 2019.

    The ABS published data on Australian average weekly earnings (AWE) for November 2019.   On a trend basis, full-time adult average weekly ordinary time earnings were up 3.2 per cent over the year in November, rising to $1,659, equating to a weekly increase of around $52.  That was up from the 2.5 per cent increase ($39/week) recorded over the same period in the previous year. Note that the semi-annual AWE series differs from the quarterly WPI series discussed above.  The AWE survey is designed to measure the current level of average earnings in Australia, which it does by taking data on the total earnings paid to employees by a business and the total number of employees in the business, to derive average earnings. 

    As well as changes in the price of labour, AWE estimates are affected by changes in hours worked and by compositional changes in the workforce.  In contrast, the WPI measures changes in the wages and salaries paid by employers for a unit (that is, an hour) of labour where the quality and quantity of labour are both held constant. So, unlike the AWE, the WPI is not affected by compositional effects, as it prices a fixed amount of labour services for each job.  For more detail on the difference between the two series, see here. 

    The IMF has issued a new G-20 Surveillance note.  The forecasts included here are unchanged from the January World Economic Outlook update and therefore don’t account for the potential impact of Covid-19.  In some accompanying commentary, Fund Managing Director Kristalina Georgieva notes that the likely scenarios for China and the world economy more generally will vary depending on how quickly the virus is contained.  In the event of a swift resolution, the IMF would ‘expect the Chinese economy to bounce back soon. The result would be a sharp drop in GDP growth in China in the first quarter of 2020, but only a small reduction for the entire year. Spillovers to other countries would remain relatively minor and short-lived, mostly through temporary supply chain disruptions, tourism, and travel restrictions.’  

    Alternatively, more severe outcomes would ‘result in a sharper and more protracted growth slowdown in China. Its global impact would be amplified through more substantial supply chain disruptions and a more persistent drop in investor confidence, especially if the epidemic spreads beyond China.’  The note also flags estimates that the average growth shortfall associated with a climate-related natural disaster such as a drought, fire or flood is about 0.4 percentage points in the year of the event. Somewhat more positively, it estimates that the Phase 1 trade deal between the US and China could reduce the previous drag on growth from trade tensions by 0.2 percent this year, although that is only about one quarter of the total estimated drag. 

    The Economist reviews the implications of Covid-19 for global value chains (GVCs).  One interesting point here is that the serious 2011 disruptions to business activity in Japan and Thailand were supposed to have prompted a major rethink about the risks associated with GVCs, and yet despite all the warnings at the time and afterwards, businesses have once again found themselves exposed to GVC-related risks.   

    Sticking with Covid-19, here is the WSJ on the impact on the World Bank’s pandemic-catastrophe bonds. 

    Also from the WSJ, could India be the next candidate for a trade war with the United States? 

    Nouriel Roubini sets out his take on the white swans of 2020.  These are the ‘known unknowns’ currently threatening the global economic outlook. The NYT highlights the growth in so-called ransomware attacks. An FT Big Read on Sweden’s experiment with negative rates. 

    Two interesting columns from VoxEU. One looking at the impact of Brexit on the pound, and a second examining the forces shaping the global trade in wine. 

    The OECD provides a detailed review of developments in corporate bond markets.  It estimates that the global stock of non-financial corporate bonds reached a record high of US$13.5 trillion at the end of 2019 as companies took advantage of the low interest rate environment.  The report also notes that, compared to previous credit cycles, the contemporary stock of corporate debt has a lower overall credit quality (in 2019, 25 per cent of all issuance was sub-investment grade), higher payback requirements, longer maturities (the average maturity of investment grade debt has risen to 13 years compared to 9.4 years in the early 2000s) and worse covenant protection.   

    FT Alphaville on the controversy surrounding a World Bank paper showing that after foreign aid flows into a country, there’s an increase in deports into tax havens from that same country, implying that a significant share of that aid is being siphoned off.   

    Roger Backhouse profiles the late, great Paul Samuelson, who revolutionised economics and its teaching.  

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