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Friday 21

September, 2018 6:37 AM



Wages still ahead of prices

Wages still ahead of prices

The wage price index rose by 0.5 per cent in the March quarter to be up 1.9 per cent over the year.

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By Expert Panel 17.05.2017

Wages still ahead of prices; Used cars in vogue

Wage price index; Consumer confidence; Lending finance

Wage growth: The wage price index rose by 0.5 per cent in the March quarter to be up 1.9 per cent over the
year. Annual underlying inflation remains below wages at 1.7 per cent.

Consumer confidence: The Westpac/Melbourne Institute survey of consumer sentiment fell by 1.1 per cent in May to 98.0. The confidence index is down 5 per cent on a year ago. The index of whether it was a good time to buy a home fell to 7-year lows.

Lending finance. Total new lending commitments (housing, personal, commercial and lease finance) rose by 7.7 per cent to a 4-month high of $72.9 billion. Loans to buy used cars hit record (30-year) highs in March. The data on wages highlights the costs faced by businesses and gives insights into future interest rate decisions. The consumer confidence figures have implications for finance providers, retailers, and companies dependent on consumer and business spending. The lending figures have implications for finance providers, retailers, and companies dependent on consumer and business spending.

What does it all mean?

Wages grew by around 2 per cent over the past year with underlying inflation up around 1.7 per cent. And while wage growth is modest, it still is running faster than inflation and thus representing real wage growth. Some analysts will use headline inflation as a gauge on real wages, however that is boosted by a temporary lift in fuel prices, which should be more subdued in the coming quarter.

The weakness in wage growth is being offset by the ultra-low interest rate environment. However there is no doubt there are risks to household consumption the longer that wage growth remains subdued – particularly in light of the fact that household debt continues to rise at a faster pace that household incomes.

The Reserve Bank would hope that wage growth lifts in coming quarters. However the key is that any lift in wages is driven by a lift in productivity – a result that would ensure that inflation remains relatively contained.

Interestingly the Reserve Bank provided more colour on its estimate of full employment (NAIRU) and the linkages with wage growth in the Reserve Bank Statement of Monetary Policy. The estimate of full employment (NAIRU) is still holding close to 5 per cent and suggests that the current level of unemployment – 5.9 per cent is a rather comfortable level for an economy that is attempting to maintain healthy growth. The relationship between full employment and wage growth (highlighted in the chart below) suggests that wage growth is bottoming out.

The monthly consumer confidence data essentially mirrors yesterday’s Roy Morgan poll. It is clear that household confidence has taken a hit following the Federal Budget. Also housing is out of favour: the ‘time to buy a dwelling’ index hit 7-year lows.

What do the figures show?

Wage price index

The wage price index rose by 0.5 per cent in the March quarter after a 0.4 per cent rise in the December quarter. Annual wage growth held at a record (18-year) low of 1.87 per cent.

Private sector wages rose by 0.5 per cent in the quarter while public sector wages rose by 0.6 per cent. Annual growth of private sector wages held at a record low of 1.8 per cent in the quarter. Annual growth of public sector wages rose from 2.3 per cent to 2.4 per cent.

Including bonuses (ordinary time hourly rates), wages were flat in original terms in the March quarter to be up 1.5 per cent on a year ago.

Private sector wages including bonuses fell by 0.1 per cent in the quarter to be up 1.3 per cent on a year ago – it was the first quarterly decline in wages in two years. Public sector wages including bonuses rose by 0.6 per cent in the quarter and by 2.2 per cent over the year.

Industries with fastest annual wage growth: Health care & social assistance, Education & training and Public administration & safety (all up 2.3 per cent). Electricity, gas, water & waste services, Financial and insurance services and Accommodation & Food Services (all up 2.2 per cent).

Industries with slowest annual wage growth: Mining (up 0.6 per cent); Rental, hiring & real estate services and Administrative & support services (up 1.3 per cent), Professional, scientific & technical services (up 1.6 per cent).

Annual wage growth across States & Territories: NSW, 2.1 per cent; Victoria, 2.0 per cent; Queensland, 1.9 per cent; South Australia, 2.2 per cent; Western Australia, 1.2 per cent; Tasmania, 2.3 per cent; Northern Territory, 2.1 per cent; and ACT, 1.8 per cent.

Consumer confidence

The Westpac/Melbourne Institute index of consumer confidence fell by 1.1 per cent in May to 98.0. The confidence index is down 5 per cent on a year ago.

• The current conditions index fell by 3.2 per cent while the expectations index rose by 0.5 per cent.
• Three of the components of the index fell in May:
• The estimate of family finances compared with a year ago was down by 3.1 per cent;
• The estimate of family finances over the next year was down by 6.1 per cent;
• Economic conditions over the next 12 months was up by 4.6 per cent;
• Economic conditions over the next 5 years was up by 4.2 per cent;
• The measure on whether it was a good time to buy a major household item was down by 3.4 per cent.

Housing outlook: A good time to buy a dwelling? The index was down up 6.5 per cent in May to a 7-year low of 90.0. The index is down 15.6 per cent over the year.

Lending Finance:

Total new lending commitments (housing, personal, commercial and lease finance) rose by 7.7 per cent to a 4-month high of $72.9 billion.

All housing finance rose by 0.9 per cent in March after falling by 0.7 per cent in February with construction and purchase up 0.9 per cent and alterations and additions down 3.4 per cent.

In trend terms, loans for alterations & additions hit 6½-year highs in March.

Commercial finance rose by 13.0 per cent in March after rising 2.3 per cent in February. Within commercial commitments, fixed lending rose by 7.1 per cent while revolving credit rose by 36.8 per cent (after a 30.7 per cent gain in February). Commercial loans are up 7.1 per cent on a year ago.

Personal finance fell by 1.7 per cent in March – the third straight decline. Fixed lending commitments fell by 3.2 per cent, while revolving credit commitments rose by 0.8 per cent. Personal loans are down 11.7 per cent on a year ago.

Within personal finance loans to buy used cars hit a record (30-year) high of $630.7 million in March. In the year to March, loans to buy used cars were up by 17 per cent with loans to buy new cars up 11.8 per cent.

Lease finance fell by 13 per cent in March after a 32.1 per cent fall in February. Lease loans are up 2.1 per cent over the year.

What is the importance of the economic data?

The Wage Price Index has been compiled since September quarter 1997 and measures quarterly changes in wage and salary costs for employees. The index is based on a representative sample of employees, and includes measures of non-wage costs including superannuation, payroll tax, public holiday and workers compensation. The Wage Price Index is useful in measuring wage pressures in the economy. While strong growth in wages would boost domestic spending, it could also serve to lift employer costs and prices and add to economy-wide inflationary pressures. The wage price index is a measure of hourly pay rates (excluding bonuses).

Westpac and the Melbourne Institute release the Index of Consumer Sentiment each month. According to Melbourne Institute: “The survey of consumer sentiment was first undertaken in 1973 and was conducted on a quarterly basis until 1976, a six-weekly basis from 1976 to 1986, and has been conducted monthly ever since.” Confident consumers may be more inclined to spend, especially on major items.

Lending Finance is released monthly by the Bureau of Statistics and contains figures on new housing, personal, commercial and lease finance commitments. The importance of the data lies in what it reveals about the appropriateness of interest rate settings, confidence and spending levels in the economy.

What are the implications for interest rates and investors?

Wages continue to outpace prices…just. Add in the strong flow of dividends from companies, lower interest rates and higher home prices and there still exists spending power to boost sales at retailers. Clothing, food, travel and car affordability are all at record highs.

The ‘new conservatism’ for Aussie consumers now extends to car buying with used cars back in vogue in preference to new cars.

The Reserve Bank Governor is seemingly content. However he will clearly watch carefully all the key data releases over the next few months. Any sign that the economy won’t grow by 3 per cent in 2017 and that inflation is headed down, not up, then rate cuts would be back on the agenda.

Have home prices peaked in Sydney & Melbourne? Perhaps. The ‘time to buy a dwelling’ index hit 7-year lows in May; renovation lending is at 6½-year highs; and the CoreLogic daily home price index for Sydney has fallen 1.6 per cent over the past month. 

Originally published by Craig James, Chief Economist, CommSec
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