One of the points in today’s mid-year economic and fiscal outlook that has some people scratching their heads is the bullish forecast for wages growth to rebound to 3.5% in the not-too-distant future while unemployment stays at the same level.
Wages growth has been absent in advanced markets around the world and it took the US unemployment rate dropping below 4% — basically with the economy approaching full employment — before wages started to stir. The MYEFO suggests wages growth will rebound while unemployment stays at around 5%.
Callam Pickering, APAC economist at employment company Indeed, said:
— Callam Pickering (@CallamPickering) December 17, 2018
Here’s what RBC Capital Markets chief economist Su-Lin Ong has to say about that in a note just out:
Wage forecasts too optimistic and inconsistent with the international experience
The key macro forecasts contained few surprises, but there are a number of flaws in our view. Despite a ¼% downward revision to 2018 GDP and inflation to 2¾% and 2%, respectively, nominal GDP has been bumped up by 1%, reflecting stronger commodity prices underpinning a higher terms of trade profile than expected. The GDP forecast for next year and projections are held steady at a near-trend/slightly-above-trend 3% pace. The near-term inflation profile has been revised down but retains a rising profile with a pattern similar to the wages forecasts/projections and a relatively large ½% increase in both 2019–20 and 2020–21 to 3% and 3½%, respectively. Wages growth is expected to rise a full percentage point over the next two years. Interestingly, the unemployment rate is expected to hold steady at 5% across the forecast horizon. The forecasts suggest little further tightening in the labour market despite continued firm activity, yet wages and inflation continue to rise over the forecast horizon. The international experience would suggest that this will prove challenging.
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