I think that, in terms of the prospects of the global economy, the most important figure is the one I added to the end of the text. It shows the unemployment rate in the developed world. What does this figure tell us and in what context should we interpret it?
From the end of the 1980s, there were two major changes in the global labour market: China and East-Central Europe joined, flooding the world with surplus labour supply. The cheap labour had numerous impacts:
- it kept the wages of the lower-middle and middle classes low, which increased wealth inequalities and made room for anti-globalization populist movements to gain ground
- because of the low wage inflation, there was basically no risk of inflation since the 1980s; deflation became the main topic, which pushed interest rates lower and lower, while share markets (due to decreasing discount factors) kept increasing, and the expensive shares just amplified wealth inequalities even further, because the wealth of those with less major savings rose.
All in all, the increasing global labour supply has brought low inflation, low interest rates, and high share prices.
The problem is, it seems there is a shift happening. It seems that China is running out of labour, wages are rising, and it has lost its earlier significant competitive advantage.
‘Average wages in China’s manufacturing sector have soared above those in countries such as Brazil and Mexico and are fast catching up with Greece and Portugal after a decade of breakneck growth that has seen Chinese pay packets treble… Average hourly wages in China’s manufacturing sector trebled between 2005 and 2016.’
Cheap labour has disappeared from our region too, and wage rise is about to reach two-digits percentage. The new joiners (East-Central Europe, China) have caught up in wages and no longer put pressure on the salary levels of the middle/lower-middle class workers in developed countries. It all happens when – and here comes ‘the most important’ figure – unemployment rate in the developed world is at a 40-year low point.
So, while there is a wage explosion in countries that previously kept wages low, the developed world has ran out of labour. This can only lead to an accelerating wage inflation in the developed countries (US, EU, JP), which will certainly be followed by consumer price inflation and central banks raising interest rates. It seems that this long cycle, this era of low inflation and interest rates is coming to an end. In the following years, we should expect higher interest rates and wage inflation. It will have a severe impact on the stock exchange, property, and bonds.
Of course, this story will not fold out within a couple of months, but rather in many years, but it means that the strong supporting capital market environment will SLOWLY turn around in the next years, asset price inflation will end along with the growing wealth inequalities and deflationary tendencies. After the long trend, there is room for decades-long spectrum trading in the global stock exchanges, similarly to the 1970s.
Original date of Hungarian publication: October 13, 2017