US Macro: Unit labour cost growth much higher than previously thought – Productivity grew 2.9% qoq annualised in Q2, and unit labour costs fell by -0.9%, according to the preliminary reading on Productivity and Costs released today. Quarterly data are notoriously volatile, however, and the more significant news came from the revisions to historical data, which reflected the recent Comprehensive Update to the national accounts. Instead of the almost-flat reading on unit labour cost growth of 0.4% in 2017, as initially thought, costs actually grew by 2.2% – a 1.8pp upward revision, and the highest ULC growth since 2011 (a year which followed two years of declines). The revision was almost entirely due to an upward revision to hourly compensation, which grew 3.4% rather than 1.7% as previously thought, while productivity growth was also revised down slightly, from 1.3% to 1.1%. With unit labour costs considerably higher than previously thought, this suggests the impact of the tight labour market on cost growth was also bigger than thought. The question is, why has this yet to lead to higher inflation? While it is too early to say for sure, we suspect that companies are for now choosing to absorb higher costs rather than pass these onto consumers, meaning the unusually depressed labour share of income may finally be on the rise (see also here). How long this can be sustained remains to be seen, but this could suggest somewhat greater inflationary pressure in the pipeline than we had previously thought. (Bill Diviney)
Emerging Markets: Turkey saga continues, but contagion to be limited – The lira has recovered somewhat today, helped by the announcement this morning that FX swaps will be limited to 25% of banks’ equity (previously 50%). This will limit the ability of locals to do FX swaps. USD/TRY is now back to the low 6’s at the time of writing. However, the fall in the lira will result in a significant rise in the already high inflation rate (15.9% in July) in the coming months, and a sharp fall in purchasing power. Turkey is still in the eye of a storm and it is therefore difficult to forecast what the actual outcome will be. In all scenarios, however, a recession next year seems likely. Still, the magnitude of the recession and the pace of recovery later on will depend enormously on the policy choices that are made.
At the start of the week, several other (emerging markets) were hit as well. Still we think that this is a temporary phenomenon. What makes Turkey stand out is the combination of a high current account deficit, and relatively high levels of private sector foreign indebtedness, of which a high share is short term. Looking at the current account deficit, only Argentina – with a deficit of 5% of GDP – comes close to Turkey, while Argentina has high foreign debt levels as well. In our base scenario, global conditions remain supportive for EMs, financial conditions relatively accommodative, and contagion from an unfolding crisis in Turkey limited. There are, however, several factors which could cloud this picture. An escalation of trade tensions is for example an important risk, as is a sharp slowdown in China and a further sharp weakening of the Chinese yuan. For more on Turkey, see our report published today – Turkey Watch: Turkey saga continues, but contagion is expected to be limited. (Marijke Zewuster, Georgette Boele and Nora Neuteboom)