Daily Commentary BY THE CURVE TEAM –

Slack in Economy

24th of February, 2021

Wages and construction work done for Q4 embellish the dichotomy of market expectations and the real economy.

This dichotomy is not necessarily a bad thing. Markets are expected to have foresight and look beyond current positions.

But the discrepancy between the current economic environment and improving market expectations is large, which likely means the margin for error is large. Volatility in asset prices will likely ensue under these conditions.

Economic data yesterday is indicative of the slack in the economy at the moment. Wage price growth for Q4 was 0.6%, which puts it at 1.4%. Much of the jump in Q4 was from the unwinding of wage freezes and reversals of wage cuts, so there was little evidence of sustained growth.

This is well below the 5 years prior to covid, where growth hovered around 2%. It’s also a far cry from levels which the RBA believe would put upward pressure on inflation.

Construction work done was down 0.9% for Q4, leaving it down 1.4% for the year. Relative to recent years this isn’t so bad.

2019 construction work done was down 6.2%, so the smaller falls for the past 12 months isn’t so bad. Homebuilder grants have driven the improvement, with residential construction up 2.7% for the quarter and renovations up 10% in 2020.

Josh Stewart

Associate - Money Markets