UNIQA Capital Markets Weekly

Among age cohorts (Figure 1), the largest annual declines were recorded among younger (under 19 years: -21.8 %, age 20-24: -13.0 %) and middle-aged persons (age 40-44: -7.8 % and age 45-49: -8.1 %), while the number of the elderly unemployed continued to rise (age 55-59: +5.8 % and above 60 years: +9.8 %). The age group of 55 to 60 years old also recorded the largest number of unemployed persons (40,418) among all age cohorts.

At the same time, the job growth has been accelerating gradually since around 2014/15. In August, the number of employed persons rose by 2.1 % (above 3.7 million) compared to last year when monthly job growth averaged 1.5 %. Manufacturing employment rose by 3.9 % (y/y) in July. Equivalently, employment in the construction sector has followed an upward trend since 2015.

The overall upturn in the Austrian business cycle, rising employment and the slowing unemployment rate bode well for the earnings development. Growth in monthly gross wages in the industrial and construction sectors averaged 3.1 % (y/y) during the three months until June. The sectors recorded average wage increases of 2.2 % during the last year. In real (inflation-adjusted) terms, wages have been rising by 1.3 % (y/y), while in 2015 and 2016 real wage growth was on average 1.6 % and 1.3 %. Since 2011, real wage growth amounted to 1.1 % on average contradicting the common perception of stagnating real wage developments.

The quarterly index of (nominal) compensation (published by the European Central Bank) broadly confirms the positive earnings development (both in terms of employees and hours worked), although most recently it has been decelerating. In Q2, compensation per employee rose by 1.2 % compared to the corresponding quarter in 2016 (seasonally-adjusted).

For the total of the Euro Area, compensation per employee rose by 1.3 % (y/y) in the first quarter of the year as well as during 2016 (Figure 2). Among the large Euro countries, Germany recorded highest growth (2.5 % in Q2 and 2.2 % in 2016) and Spain kept recording low labor compensation growth (-0.1 % in Q1 and +0.3 % in 2016).

In its June macroeconomic projections, the ECB forecasted that compensation per employee will rise by 1.7 % in 2017, 2.1 % in 2018 and 2.4 % in 2019 based on the outlook of sustained solid GDP growth (1.9 %, 1.8 % and 1.7 % in 2017-19), rising core inflation (1.1 %, 1.4 % and 1.7 %) and a continuing decline in the unemployment rate (9.4 %, 8.8 % and 8.3 %). It is assumed that the recovery in the Euro Area labor markets will drive labor costs higher as unemployed persons become scarcer and labor unions regain wage bargaining power. In turn, higher compensation might drive domestic ("underlying") inflation.

The EUR nominal effective exchange rate has recently appreciated around 4 % since May/June. The currency appreciation might affect the inflation rate as lower import prices pass through to domestic consumer prices over the coming months and in 2018. Hence, ECB staff inflation projections bear risks of downward revisions. On the other side, the GDP growth forecast might be revised upwardly and thereby compensate for the negative FX effect on headline inflation. The September ECB staff macroeconomic projections will be released on Thursday ahead of the governing council meeting.

A closer look at Jackson Hole

Draghi’s pledge to openness, Yellen’s support of financial stability and economists’ stance on the global economy

Between August 24 and 25 central bankers, policymakers, academics and economists met in Jackson Hole to discuss a broad selection of topics linked to the symposium’s focus on fostering a dynamic global economy. Among the highlights were speeches by the ECB’s president Mario Draghi and the chair of the Federal Reserve Janet L. Yellen both of whom did not use the opportunity to actively form financial market participant’s expectations of future monetary policy decisions. Draghi gave a speech on the importance of multilateral cooperation for trade openness while Yellen talked about financial stability and regulation. Yet, the Euro strengthened by 1.5 % against the USD from 1.18 (August 24) to 1.198 (August 28).

Focusing mainly on the US financial system, Yellen gave an outline of the financial turbulences during the 2007/08 financial crisis, the various US government agencies’ emergency reactions and their subsequent regulatory responses. Those encompass stricter capital requirements, particularly for financial institutions of systemic relevance, the mitigation of risks associated with maturity transformation as well as liquidity mismatches, and improved bank resolution mechanisms. Based on evidence of annual stress tests, these measures have improved the stability of the financial system. However, tighter financial regulation might well come at a cost. Financial regulation can limit credit availability, for small firms in particular, and negatively affect investment and economic growth. According to Yellen, the negative effects on lending are by large outweighed by the regulation’s positive stability gains. Moreover, the 2016 small business credit survey points to the fact that small businesses with solid credit histories are well supplied with credit, suggesting only a limited negative effect on economic growth, at least through the credit channel. Yellen, thus, draws a positive conclusion emphasizing the importance of financial regulation and its adaptability to new forms of risk formation for the next decades to come.

In contrast to Yellen, Draghi focused on the importance of openness for potential output and productivity growth. As the global economy is recovering, medium-term perspectives are becoming more important and the slow-down of potential output growth since 2000 is a key concern in this respect. Fostering productivity growth is an important component of raising potential output growth, especially with an aging demographic structure. From a global perspective, Draghi sees openness as the main contributor to productivity growth mainly through its key role for the diffusion of new technologies. In spite of the positive productivity effects of openness, the social consensus on global trade weakens and protectionism is back on the political table. At the same time awareness has been rising that the net gains from open markets are not distributed equally within and across societies, market participants are not playing by the same rules, and globalization brings harmful international spillovers. Identifying these concerns, Draghi pledges for increased multilateral cooperation to achieve regulatory convergence, address tax arbitrage and ensure labor protection. Linking to the topic of financial stability, which Yellen has discussed for the United States, regulatory and supervisory convergence of cross-border finance is a key topic in making openness sustainable and ensuring expansionary monetary policy to work.

Besides, the two speeches by Draghi and Yellen the symposium was dominated by academic sessions discussing topics on U.S. economics growth, international trade, global imbalances and fiscal policy. Closely related to Draghi’s focus on productivity growth, Chang-Tai Hsieh (University of Chicago) and Peter J. Klenow (Stanford University) presented a paper which assesses the importance of factor reallocation to U.S. productivity growth. In contrast to the previous belief that factor reallocation from low productivity to high productivity firms has been crucial for U.S. economic growth over the past decades, the two researchers argue that own product improvement has been the key contributor as allocation efficiency has not improved in the U.S. in recent decades. This implies that the slowdown of productivity growth during the last decade cannot be attributed to the decline in firm entry and job reallocation. The authors rather suggest that slow productivity growth is associated with declining incentives of incumbent firms to innovate.

Closely related to the symposium’s focus on international trade, Nina Pavcnik (Dartmouth College) presented an article on the distributional effects of international trade in developing countries. Trade openness affects income distributions across as well as within-countries and the regional effects on local labor markets seem to be quite persistent. Low degrees of labour mobility and negative regional spillovers into poor education, crime and health outcomes further dampen future growth potential. Thus, the extent of adverse trade effects on within-country income distributions depend on factor mobility both across regions but also across industries. Surveys, however, show that openness is not perceived as the main driver of inequality in developing countries. Policies to compensate for adverse trade effects and reduce barriers to adjust to changing market conditions will become more important in order to achieve, what Draghi has called, sustainable openness. A contribution by John Van Reenen (MIT) on the Brexit and the Future of Globalisation identifies the unequal distribution of benefits from globalization as a main reason for the political uncertainty the U.S. and Britain are currently facing. The economic consequences of Brexit are estimated between a welfare loss of 1.3 % and 2.7 %. These estimates are based on balancing the negative effects from higher tariff and non-tariff barriers with the positive effects from lower fiscal contributions to the EU. The loss of indirect dynamic positive trade effects, for instance through stimulating innovation and foreign investment, are not considered and would inflate the negative welfare contribution to between 6.3 % and 9.6 % of GDP. As these losses will not be predominantly carried by the top of the income distribution but will be shared democratically, protectionism is not a viable solution to solve negative distributional effects of globalization.

The persistence of global current account imbalances is a further widely debated topic associated with the openness of global markets. Menzie D. Chinn (University of Wisconsin) presented a discussion paper on the question why global imbalances in current accounts have returned after the global financial crisis. His research shows that even though current account imbalances have returned, their structure has changed. Since the global financial crises fiscal policy has become more prominent as a determinant of global imbalances. The importance of the US dollar, as the key international reserve currency, to explain US current account deficits, however, has not eroded over time and is expected to contribute to US current account deficits in the future. To what extent fiscal stimulus is linked to fiscal sustainability is the objective of the paper presented by Alan J. Auerbach (UC Berkeley) and Yuriy Gorodnichenko (UC Berkeley). As the scope for countercyclical monetary policy remains limited, fiscal policy may be more important for the next recession to come. Fiscal stimulus programs which were introduced during the Great Recession have, however, led to high public debt burdens questioning the possibility of active fiscal policy in the future without threatening debt sustainability. The authors find that expansionary government spending shocks did not lead to a persistent increase in debt-to-GDP ratios or borrowing costs, particularly when performed during a period of economic weakness. As the authors emphasize, these findings are, however, conditional on their sample and might not be consistent for out-of-sample predictions once the economic environment changes. Nevertheless, it strengthens the point that counter-cyclical spending can boost GDP high enough to ensure fiscal sustainability.

Disclaimer
This publication is neither a marketing document nor a financial analysis. It merely contains information on general economic data. Despite thorough research and the use of reliable data sources, we cannot be held responsible for the completeness, correctness, currentness or accuracy of the data provided in this publication.
Our analyses are based on public Information, which we consider to be reliable. However, we cannot provide a guarantee that the information is complete or accurate. We reserve the right to change our stated opinion at any time and without prior notice. The provided information in the present publication is not to be understood or used as a recommendation to purchase or sell a financial instrument or alternatively as an invitation to propose an offer. This publication should only be used for information purposes. It cannot replace a bespoke advisory service to an investor based on his / her individual circumstances such as risk appetite, knowledge and experience with financial instruments, investment targets and financial status. The present publication contains short-term market forecasts. Past performance is not a reliable indication for future performance.

Imprint
Information required pursuant to the Austrian Media Act
Publisher of this publication:
UNIQA Insurance Group AG
Untere Donaustraße 21, A-1029 Vienna, Austria
Media owner of this publication:
UNIQA Capital Markets GmbH
Untere Donaustraße 21, A-1029 Vienna, Austria
Management Board of UNIQA Capital Markets GmbH:
Dr. Andreas Bertl, Mr. Franz Hagmann
UNIQA Capital Markets GmbH is constituted as a limited liability company; the media owner is licenced as an investment firm and regulated by the Austrian Financial Market Authority (FMA-Finanzmarktaufsicht).
Ownership structure of the media owner:
UNIQA Insurance Group AG is 100% owner of UNIQA Capital Markets GmbH.
Basic tendency of the content of this publication:
Information on general economic data.