Fitch: Sharp US Wage Shock Could Cause Global Tightening; Major Slowdown

A domestic US wage cost shock could lead to substantial financial tightening, which would result in a significant slowdown in the world economy, according to a new global macro scenario report from Fitch Ratings. In the report Fitch economists explore the consequences of a much faster-than-expected pick-up in US wage growth and the impact on economic growth, Fed policy and bond yields as well as international macroeconomic spillovers. 

"Fitch's baseline forecast is for US wage growth to pick up gradually, which would support household incomes and help bring inflation back to target as the Fed gradually normalises policy, but a very sharp increase in US wage inflation would be problematic," said Brian Coulton, Chief Economist, Fitch. "A surge in US wage inflation would prompt the Fed to hike rates much more quickly than expected and threaten the lower-for-longer market consensus on interest rates that underpins current very low bond yields." 

The failure of US wages to pick up sharply in the last few years despite the fall in unemployment has cast doubt on the validity of any inverse relationship between the unemployment rate and wage inflation. However, modest wage inflation in the last couple of years may have been partly explained by the strengthening of the dollar and the fall in energy prices after mid-2014, which pushed down US consumer prices and boosted purchasing power. As the impact of these shifts on consumer price inflation fades the traditional inverse relationship between wage growth and unemployment may reassert itself. Some indicators of US wages (including the Atlanta Fed wage tracker) already show signs of acceleration. 

"The emergence of significant domestically generated US inflation pressures would represent a big shock to the current market consensus that the Fed will be able to continue on a very gradualist path towards normalising monetary policy," added Coulton. "In this scenario there would be a risk of a rise in bond yields from current low levels, which appear to be pricing in a fairly low level of future interest rate volatility." 

Fitch has examined a scenario where US wage inflation rises swiftly to over 5% by 2018 and US and global bond yields increase by 100 bps (relative to baseline). These shocks - combined with an assumed rise in global risk aversion in the form of a 50bps rise in emerging market sovereign dollar bond spreads - result in a 0.7pps reduction in global GDP growth in 2017. World growth would slow to 2.1%, the weakest growth since the post financial crisis recovery began in 2010.

The benefits of higher wages on US consumer spending would be quite quickly offset by up-front rate hikes from the Fed. Fitch's simulations (which use the Oxford Economics' Global Macroeconomic Model) suggest the Fed would react by raising interest rates by an additional 150bps (relative to baseline) over the course of six months. In combination with the impact of higher wage costs and bond yields, this would see growth 1.4pps lower than baseline in the US in 2017, at 0.6%. About half the impact on US growth stems from the Fed's reaction and higher wage costs and half from higher bond yields. 

The impacts outside the US would be smaller, but still significant. In the eurozone, Japan and the UK growth would be around 0.3pps weaker than baseline in 2017. Among emerging markets, growth is around 0.7pps weaker than baseline in China, Russia, Mexico and Turkey, but the effect would be smaller elsewhere. Most of the impact outside the US stems from the shock to bond yields. 

News



...

7 More Hanjin ships seized, as freight rates surge and cargo owners fret

Hanjin Shipping vessels have been seized at Chinese ports in the wake of the South Korean firm's collapse, further roiling the industry as freight rates jump and manufacturers scramble for alternatives.Seeking to contain the fallout, a South Korean court said it would soon begin proceedings to rehabilitate the carrier - which would allow Hanjin to
Read more...


6 US to blame for trade talks failure: French minister

U.S. protectionism is being blamed by French and German government ministers for important free trade talks between the U.S. and the European Union teetering on the brink of collapse. "Those who are protectionist are Americans, Europe is very open," Matthias Fekl, France's Minister of State for Foreign Trade, Tourism and French Nationals Abroad, to
Read more...


5 Fitch: Sharp US Wage Shock Could Cause Global Tightening; Major Slowdown

A domestic US wage cost shock could lead to substantial financial tightening, which would result in a significant slowdown in the world economy, according to a new global macro scenario report from Fitch Ratings. In the report Fitch economists explore the consequences of a much faster-than-expected pick-up in US wage growth and the impact on econom
Read more...


3 European shares open steady before key U.S data

European shares were little changed in early deals on Friday, as investors awaited for key U.S. jobs data later in the day for clues about the Federal Reserve's next interest rate hike. By 0709 GMT, the pan-European STOXX index was up 0.01 percent, following a flat close in the previous session. SBM Offshore plunged 10 percent, leading STOXX losers
Read more...


2 European shares boosted by rally in banks, miners

* STOXX 600 rises 0.6 percent * Deutsche Bank, Commerzbank lead banks higher * Commodity stocks rebound from weakness * Elekta jumps after results LONDON, Sept 1 European shares rose at the open on Thursday, buoyed by a rally in banks and a recovery by commodity stocks after recent falls. Banks gained 1.6 percent, the top sectoral risers, with talk
Read more...


1 Bank stocks are back as investors dash from cash -BAML

Investors pulled billions of dollars out of cash in the latest week and turned towards an array of bond funds and equities -- notably bank stocks -- ahead of the keenly awaited August U.S. employment report, Bank of America Merrill Lynch said on Friday. Precious metals funds suffered their biggest weekly outflow of the year as expectations of highe
Read more...


...

Services

Products

...

News

More Hanjin ships seized, as freight rates surge and cargo owners fret

Hanjin Shipping vessels have been seized at Chinese ports in the wake of the South Korean firm's collapse, further roiling the industry as freight rates jump and manufacturers scramble for alternatives.Seeking to contain the fallout, a South Korean court said it would soon begin proceedings to rehab
Read more...

US to blame for trade talks failure: French minister

U.S. protectionism is being blamed by French and German government ministers for important free trade talks between the U.S. and the European Union teetering on the brink of collapse. "Those who are protectionist are Americans, Europe is very open," Matthias Fekl, France's Minister of State for Fore
Read more...

Latest job offers

Sales representative

Senior .NET programmer

Contacts

contact us

CompanyWall UK

14 Hannover Street
LONDON, ENGLAND, W1S 1YH
info@companywall.uk

CompanyWall SLO

uzmičeva 5, 1000 Ljubljana, Slovenia
phone: +386 1 3209 292 • fax:+386 5 9 3656 60
info@companywall.si

CompanyWall CRO

Kornatska 1f, 10 000 Zagreb, Croatia
phone:+385 1 6443 785 • fax:+385 1 6443 788
info@companywall.hr

CompanyWall SRB

Milana Tankosića 27, 11 000 Belgrade, Serbia
phone:+381 11 4049 212 • fax:+381 11 4049 204
info@companywall.rs