.
A funny thing has happened in the United States labour market since the ratio of job vacancies to unemployment (V/U) started to fall early this year: The pace of monthly wage growth has accelerated. Typically, a declining V/U—a sign of labour market softening—is accompanied by slowing wage growth.
Intuitively, wage growth should ease as demand for workers falls. That it hasn’t is a function of lingering post-COVID-19 dynamics, said Adam Schickling, a Vanguard economist who studies the U.S. labour market.
“There are two key reasons for this phenomenon,” Schickling said. “Sectors remain where demand for labour well exceeds supply, such as health care, professional services, and leisure and hospitality. And firms have been reluctant to fire or lay off workers given the challenging labour supply environment.” Schickling also noted that real (after-inflation) unit labour costs are below pre-COVID-19 levels for many sectors, providing room for wages to rise further without immediately spurring inflation.
Notes: Wage changes are nominal and measured on a monthly seasonally adjusted annualised basis. Years depicted reflect periods of labour market softening as measured by a declining ratio of job vacancies to unemployment. A ratio of 1:1 suggests a labour market in balance. The ratio as of May 31, 2023, was 1.6:1. The data representation for 2023 includes actual data and the trend line. Data representations for past years include only trend lines to aid readability.
Sources: Vanguard analysis of data from the U.S. Bureau of Labour Statistics and Refinitiv Datastream through May 31, 2023.
The findings are part of the backdrop for changes to Vanguard’s U.S. economic and monetary policy forecasts. As more workers find jobs and earn more, better-positioned consumers will support growth, pricing power, and interest rates.
The views below are those of the global economics and markets team of Vanguard Investment Strategy Group as of August 16, 2023.
While markets price in just a 60% probability of a rate hike by the end of the year, Vanguard forecasts one or two more policy interest rate increases to around 4.35%–4.6%. While there have been signs of some deceleration in consumer price increases, “the Reserve Bank of Australia will want to hike one or two more times to put a final nail in the inflation coffin,” said Alexis Gray, a Vanguard senior economist.
Amid continued resilience in the labour market and the broader economy, we’ve revised our forecasts for key economic indicators and the policy interest rate.
The post-COVID-19 economic recovery that took hold in the first quarter of 2023 is being challenged from all sides. “The deceleration in economic activity in July was broad-based,” said Grant Feng, a Vanguard senior economist. “It reflects a deepening property slump, subdued investment demand, waning consumption, and weakened external sector momentum.”
The euro area didn’t fall into recession early this year after all, according to revised GDP figures showing that growth was flat in the first quarter. The narrative of economic weakness doesn’t change, however.
Recent inflation data emphasise the UK economy’s challenges. Continued strong inflationary pressures suggest that the Bank of England isn’t yet in position to halt the interest rate increases that began in December 2021 and now total more than 5 percentage points. We expect a rising policy rate to weaken demand and eventually weigh on the labour market.
Aggressive monetary policy tightening has taken hold in some emerging markets, bringing inflation down sufficiently to allow for the start of rate cuts. “We would expect emerging markets that raised rates the most to also cut them the most, though the path and timing of cuts could differ among nations and from trajectories when central banks were raising rates,” said Vytas Maciulis, a Vanguard economist.
The Consumer Price Index accelerated from 2.8% year-on-year for June to 3.3% for July largely due to base effects for gasoline prices. The average of the Bank of Canada’s preferred core measures of inflation softened but remained above target. “The Bank of Canada will no doubt remain vigilant, but the inflation data gives it room to pause in September to further assess the impacts of its tightening thus far,” said Rhea Thomas, a Vanguard economist.
Our 10-year annualised nominal return and volatility forecasts are shown below. They are based on the June 30, 2023, running of the Vanguard Capital Markets Model (VCMM). Equity returns reflect a 2-point range around the 50th percentile of the distribution of probable outcomes. Fixed income returns reflect a 1-point range around the 50th percentile. More extreme returns are possible.
Australian equities: 4.2%–6.2% (21.7% median volatility)
Global ex-Australia equities (unhedged): 4.8%–6.8% (19.4%)
Australian aggregate bonds: 3.8%–4.8% (5.5%)
Global bonds ex-Australia (hedged): 4.0%–5.0% (4.7%
Notes
All investing is subject to risk, including the possible loss of the money you invest.
Investments in bonds are subject to interest rate, credit, and inflation risk.
Investments in stocks and bonds issued by non-U.S. companies are subject to risks including country/regional risk and currency risk. These risks are especially high in emerging markets.
Important
The projections and other information generated by the Vanguard Capital Markets Model (VCMM) regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. VCMM results will vary with each use and over time.
The VCMM projections are based on a statistical analysis of historical data. Future returns may behave differently from the historical patterns captured in the VCMM. More important, the VCMM may be underestimating extreme negative scenarios unobserved in the historical period on which the model estimation is based.
The Vanguard Capital Markets Model is a proprietary financial simulation tool developed and maintained by Vanguard’s primary investment research and advice teams. The model forecasts distributions of future returns for a wide array of broad asset classes. Those asset classes include U.S. and international equity markets, several maturities of the U.S. Treasury and corporate fixed income markets, international fixed income markets, U.S. money markets, commodities, and certain alternative investment strategies. The theoretical and empirical foundation for the Vanguard Capital Markets Model is that the returns of various asset classes reflect the compensation investors require for bearing different types of systematic risk (beta). At the core of the model are estimates of the dynamic statistical relationship between risk factors and asset returns, obtained from statistical analysis based on available monthly financial and economic data from as early as 1960. Using a system of estimated equations, the model then applies a Monte Carlo simulation method to project the estimated interrelationships among risk factors and asset classes as well as uncertainty and randomness over time. The model generates a large set of simulated outcomes for each asset class over several time horizons. Forecasts are obtained by computing measures of central tendency in these simulations. Results produced by the tool will vary with each use and over time.
General advice warning
This article contains certain 'forward looking' statements. Forward looking statements, opinions and estimates provided in this article are based on assumptions and contingencies which are subject to change without notice, as are statements about market and industry trends, which are based on interpretations of current market conditions. Forward-looking statements including projections, indications or guidance on future earnings or financial position and estimates are provided as a general guide only and should not be relied upon as an indication or guarantee of future performance. There can be no assurance that actual outcomes will not differ materially from these statements. To the full extent permitted by law, Vanguard Investments Australia Ltd (ABN 72 072 881 086 AFSL 227263) and its directors, officers, employees, advisers, agents and intermediaries disclaim any obligation or undertaking to release any updates or revisions to the information to reflect any change in expectations or assumptions.
In order to better serve you, please select the appropriate contact details for the department you are looking for below.
Department | Phone | |
---|---|---|
Financial Planning | (02) 8599 0835 (Option 1) | info@capitalwise.com.au |
Accounting | (02) 8599 0835 (Option 2) | accounting@capitalwise.com.au |
Conveyancing | (02) 8599 0835 (Option 3) | conveyancing@capitalwise.com.au |
Financial Planning
(02) 8599 0835 (Option 1)
info@capitalwise.com.au
Accounting
(02) 8599 0835 (Option 2)
accounting@capitalwise.com.au
Conveyancing
(02) 8599 0835 (Option 3)
conveyancing@capitalwise.com.au