The big news this week is the Australia-China free trade agreement which, when announced, will reportedly exceed industry forecasts. It's expected the breadth of concessions made by China will benefit Australia to the tune of $18 billion over 10 years, surpassing estimates.
A range of Australian agriculture, horticulture and services industries are set to benefit from reduced tariffs and less restricted access to China’s markets. The reported gains in services appear particularly encouraging, with the opening up of access to legal, financial, aged care, hospitality, engineering, education and other sectors.
In less-spectacular news, wage growth around the world remains soft. While last week’s fall in the US unemployment rate points to some improvement, in Australia softness is expected to persist.
In the third quarter, the wage price index rose a modest 0.6 per cent and year-ended wages growth stabilised at around 2.6 per cent. From here, we envisage wages growth remaining modest over the next couple of years amid subdued labour market conditions.
This will constrain growth in household income and spending, but on the flip side, will continue to keep a lid on business costs, ultimately supporting a recovery in employment and business investment.
Developments in wages are also likely to play a significant role in determining the path for inflation and the normalisation of monetary policy globally.
For now the US Federal Reserve believes that the headline US unemployment rate understates the degree of labour market slack. In turn, this is supporting the Fed’s view that its key policy rate can remain at near-zero levels for a considerable time.
However, ANZ Research remains wary that developments in US earnings could turn quickly. In addition, this measure may lag other wages measures in picking up ‘inflationary’ compensation pressures. The challenging part will be to dissect the temporary from the more lasting inflationary pulses.
Despite slow wages growth, ANZ Research continues to expect consumer spending in Australia to gradually strengthen.
As the Reserve Bank of Australia pointed out this week, low interest rates and rising house prices have supported a modest pick-up in consumer spending over the past year or so despite soft income growth. Household spending typically picks up at this stage of the business cycle as low rates encourage people to save less.
This week, RBA communications could provide further colour on the bank’s thinking about the economic outlook. A speech by Governor Glenn Stevens on Tuesday will be watched very closely.
In currency markets, there are a few key events this week which will go some way to resolving debate in the market and providing a bit more direction on the Australian dollar for the remainder of this year.
These events, while not headline in nature, could all have a significant impact on the local currency. As we approach a shift in the global monetary cycle, the reaction to small events can become less predictable and volatility could reassert itself.