The labour market has shown signs of easing and the growth in total hours worked declined to 0.6% yoy in 2Q18, from the 2.3% yoy increase seen in 1Q18. The wage index also recorded slightly slower growth in 2Q18, up 6.5% yoy, a drop of 0.7 percentage points vs. 1Q. Seasonally-adjusted unemployment increased by 0.3% in 2Q to 2.9%. The annual growth in real wages has been on a decline, at 3.2% yoy in July, after recording a high of 11.6% yoy in March 2016.
In August, Gallup’s consumer confidence index plummeted to its lowest level in three years, to 87.3, from 116.4 in April. The nationwide house price index continued on its downward trajectory, at 6.2% yoy in July, down from 10.1% yoy and 7% yoy in April and May, respectively.
Annual CPI inflation reverted to 2.7% yoy in March, after dipping briefly to 2% yoy in May on the back of a recovery of airfare prices and an increase in house prices. CPI excluding housing has risen significantly, by 1.4%, since July. Underlying inflation has also increased in recent months and stood at 2.9% yoy in July vs. April’s 2.3%. The market’s short- and long-term inflation expectations have also increased vs. the previous survey in May. Now, inflation is expected at 3% both one and two years ahead, and to average at 2.8-3% over the next 5-10 years, which is 0.2-0.4 percentage points higher than the previous survey. The central bank’s inflation outlook has also deteriorated since its previous forecast; currently, inflation is projected at 2.8% in 3Q18E and about 3% from 4Q18E to mid-2019E, after which it is expected to revert to its target (2.5% yoy).
GDP growth has been outperforming the bank’s forecasts and is projected to grow by 3.6% this year, as it did in 2017, owing to a positive contribution from net trade. Tourism is expected by the central bank to grow more slowly this year than believed previously, but its contributions have been offset by stronger growth in marine product exports. GDP growth is projected to ease over the next two years due to weaker exports demand and a slower increase in domestic demand. The central bank expects GDP to slow down to 2.7% in 2019E, and then pick up slightly to 3% in 2020E.
MPC members noted that long-term inflation expectations have risen somewhat above the target. Some members believe that this is due to uncertainty regarding the future monetary policy framework. Members also noted that inflation has risen by all measures, but the outlook has deteriorated as well, while the tension in the labour market and the economy is subsiding.