ULC Growth Probably Peaked But Remains Challenge To Services

RBA Governor Lowe noted in his remarks on Wednesday that one of the reasons for the June hike was due to upside risks to inflation from persistent services inflation, which he stated is now “here” and not just an overseas phenomenon (see MNI: Lowe: Persistent Services Inflation "Here", Tightening Not Done). He also observed that strong services inflation is linked to current high unit labour cost growth (see MNI: Lowe: Upside Inflation Risks Increased Since April Pause).

• Q1 productivity fell 4.5% y/y, the lowest annual rate since the series began in 1979, and ULC rose 2% q/q to be up 7.9% y/y from Q4’s 6.9%, the highest since 1990 outside the pandemic (see MNI: Q1 Productivity Growth New Record Low). The RBA has 1% productivity growth in its inflation forecasts. Our estimates show that no increase in hours worked from Q3 2023 is required to achieve that by Q1 2024, which would bring ULC down to 3% (using RBA GDP and WPI forecasts). It also appears that Q1 2023 was the peak in ULC growth.
• Given Lowe’s comments and the chart below, the Q1 data is only going to increase inflation risks and the RBA’s concerns. There is a 64% correlation between ULC y/y% and services inflation since 1988. While ULC troughed 2 quarters after services inflation, they have been moving higher together since mid-2022.

Source: MNI - Market News/ABS

Australia ULC y/y% with scenarios

Source: MNI - Market News/ABS/RBA