There are good times ahead for the world's economies according to the latest ANZ Research Quarterly.
Global growth is strong and as broad based as at any time in the last decade, and commodity prices are likely to rise further over 2018 as can be seen in the infographic at the end of this article.
Authors Felicity Emmett and David Plank from ANZ say:
1. RBA WAITING FOR A WAGES RECOVERY
The growth outlook remains positive, but wage growth and inflation remain low.
Wages growth has troughed, but further acceleration is likely to be very gradual.
We see a lift in wage growth this year as a pre-requisite for RBA hikes in 2019.
2. GROWTH TO PICK UP IN 2018
Despite a fairly lacklustre growth performance in 2017, we continue to expect GDP growth to lift to around 3% in both 2018 and 2019.
While Q4 GDP growth was a little disappointing, the key drivers of rising non-mining business investment and expanding public spending remain in place, with substantial pipelines of work to be done in each case.
Elsewhere, we expect a rebound in housing investment in the first half of 2018 – reflecting the pick-up in building approvals in the second half of 2017.
3. CONSUMER SPENDING UNDER PRESSURE The greatest challenge to the forecasts comes from the consumption outlook.
The acceleration in household spending through the second half of 2017 took us by surprise, and the sharp decline in the saving rate now evident was also unanticipated.
The saving rate has now fallen below 3%, well down from the 10%-plus peak seen in 2008.
The saving rate cannot continue to fall at the same pace as it has in the past few years.
If income growth remains weak then the current low level of the saving rate will compromise the ability of households to maintain their recent spending pace.
Our central case is that household income growth lifts over the coming year, which would allow spending to broadly maintain the pace of growth of the past few years without needing further declines in the household saving rate.
However if income growth disappoints, consumption growth, and with it overall GDP growth, will likely disappoint.
Uncertainty surrounds both the outlook for income growth and households’ views toward saving in an environment of subdued house-price growth.
A more cautious approach by households would dampen the economic outlook.
Of course, we could be surprised by the extent to which households are prepared to run down their saving rate, as they have over the past year.
From our perspective, the lift in household income will be driven by both employment growth and wage growth.
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While we expect employment to continue to expand it is unlikely to continue at the current 3.3% annual rate.
Elevated business conditions and hiring intentions, as well as ongoing strength in a range of job vacancy measures, suggest the near-term outlook for employment remains very positive.
And the solid growth outlook over the next two years points to ongoing improvement in the labour market.
Despite the strength in jobs growth, labour market spare capacity remains high.
Unemployment is still significantly above the 5% NAIRU level, while underemployment is running well above historical averages.
This overall excess labour market spare capacity is likely to remain a headwind for wages growth for some time, albeit an abating one.
There are, however, some reasons to be cautiously optimistic on wages.
The first is the marked improvement in job security.
Labour market insecurity is thought to have played a significant role in the weakness in wages around the world.
In a recent study, the RBA acknowledged that “weaker job security perceptions have provided a small drag on wage growth in recent years” in Australia.
Over recent months, however, a number of measures of job security have improved: unemployment expectations have fallen sharply (Figure 3), the ABS measure of expectations of redundancy has dropped considerably, while the proportion of employees looking to switch employers voluntarily has lifted to its highest rate since 2009.
All this suggests that the impact of job insecurity is likely to be fading as a constraint on wage growth.
Another factor that usually heralds a pick-up in wage growth is the increased difficulty of finding labour.
Both survey measures and business liaison suggests that firms are finding it harder to find suitable workers in some sectors of industry.
While this is encouraging, we acknowledge that competitive pressures in the current environment seem to be limiting businesses’ perceived ability to pass on higher wage costs through prices.
Eventually, however, as the labour market tightens we expect that businesses will be forced to increase wages to attract staff.
The slightly more positive atmospherics for wage growth seem to be having an effect, admittedly a small one.
The wage price index (WPI) rose by 0.6% q/q and 2.1% y/y in Q4, which was a touch stronger than expectations, and the first positive surprise for the market since Q4 2013.
Adding to the slightly stronger tone of the report was the fact that more than 60% of industries are now experiencing wage acceleration compared with just 16% a year ago (Figure 4).
Annual growth in both the WPI and the GDP measure of average wages have clearly troughed.
We expect to see further gradual improvement through this year.
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