Macro and Australian equity strategist, Macro Strategy Advisors

Shane Lee

Macro and Australian equity strategist

Macro Strategy Advisors

Thematic (Sector/Industry)

Australia Consumer discretionary / Thematic (Sector/Industry)

Stay Underweight Discretionary Retail. In our note dated 2 February 2018, “Going into Survival Mode: The Rush to Innovate”, we described the structural forces suppressing wages growth and how they are likely to persist for some time and remain a macro headwind for Discretionary Retail.  Indeed, consumers spend at their expected pace of income growth, which is linked to their current pace of income growth.  In this note, we attempt to analyse the fundamentals to put the weak wages growth environment into context.  Remain Patient and Wages will lift. The last two Labour Force Reports have shown a marked slowdown in employment growth from that seen during the previous 12-months.  Furthermore, this has raised concerns that any hope a lift in wages growth has disappeared.  We analyse previous cycles of wages growth and calculate the growth in employment during these cycles and find that it's more important to sustain employment growth even if it is weaker than we experienced last year.  Employment growth could slip from its current pace of 0.7%QoQ to 0.5% QoQ and wages growth would still likely lift by 1%pt to 3.0%.  However, this more modest pace of growth would need to be sustained for at least another 12 months. Making a Dent in Excess Capacity. The underutilisation rate hasn’t budged for 3 years and remains around 14%.  This is a broader measure of labour market capacity than the unemployment rate and incorporates workers who would like more working hours.  We find that, on average, a 1%pt increase in wages growth is consistent with a 1.5%pt fall in the underutilisation rate.Sustainability is also the Key When Reducing Excess Capacity. Our work on employment demand and utilisation naturally raises the question about what pace of GDP is needed to reduce underutilisation.  GDP tends to detach from domestic demand due to movements in net exports, which don’t necessarily lead to adjustments in labour demand.  Similarly, movements in productivity growth affect the relationship between GDP and employment.  Despite these shortcomings, the data suggest that GDP growth of 2.75% is consistent with a 2.5%pt decline in underutilisation provided it is sustained for at least a couple of years.  This is probably a slightly above-trend pace of growth, but the important point is that this data shows it must be sustained for at least 12 -months

Stay Underweight Discretionary Retail. In our note dated 2 February 2018, “Going into Survival Mode: The Rush to Innovate”, we described the structural forces suppressing wages growth and how they are likely to persist for some time and remain a macro headwind for Discretionary Retail.  Indeed, consumers spend at their expected pace of income growth, which is linked to their current pace of income growth.  In this note, we attempt to analyse the fundamentals to put the weak wages growth environment into context.  Remain Patient and Wages will lift. The last two Labour Force Reports have shown a marked slowdown in employment growth from that seen during the previous 12-months.  Furthermore, this has raised concerns that any hope a lift in wages growth has disappeared.  We analyse previous cycles of wages growth and calculate the growth in employment during these cycles and find that it's more important to sustain employment growth even if it is weaker than we experienced last year.  Employment growth could slip from its current pace of 0.7%QoQ to 0.5% QoQ and wages growth would still likely lift by 1%pt to 3.0%.  However, this more modest pace of growth would need to be sustained for at least another 12 months. Making a Dent in Excess Capacity. The underutilisation rate hasn’t budged for 3 years and remains around 14%.  This is a broader measure of labour market capacity than the unemployment rate and incorporates workers who would like more working hours.  We find that, on average, a 1%pt increase in wages growth is consistent with a 1.5%pt fall in the underutilisation rate.Sustainability is also the Key When Reducing Excess Capacity. Our work on employment demand and utilisation naturally raises the question about what pace of GDP is needed to reduce underutilisation.  GDP tends to detach from domestic demand due to movements in net exports, which don’t necessarily lead to adjustments in labour demand.  Similarly, movements in productivity growth affect the relationship between GDP and employment.  Despite these shortcomings, the data suggest that GDP growth of 2.75% is consistent with a 2.5%pt decline in underutilisation provided it is sustained for at least a couple of years.  This is probably a slightly above-trend pace of growth, but the important point is that this data shows it must be sustained for at least 12 -months

Aussie Wages Growth: It Will Come, Be Patient