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December, 2018 7:17 PM



Bonus payments lift wages

Bonus payments lift wages

The Westpac/Melbourne Institute survey of consumer sentiment index fell by 0.6 per cent to 101.8 points in May.

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16.05.2018 04:25 PM

Bonus payments lift wages; Consumers are OK
Consumer sentiment; Wage Price Index

Consumer confidence: The Westpac/Melbourne Institute survey of consumer sentiment index fell by 0.6 per cent to 101.8 points in May. The index remain above its long-term average of 101.5 points. A reading above 100 points denotes optimism.

Wages: The wage price index rose by 0.5 per cent in the March quarter after a 0.5 per cent rise in the December quarter. Annual wage growth remained steady at an 18-month high of 2.1 per cent.

Bonuses paid: Including bonuses (ordinary time hourly rates), wages rose by 0.6 per cent in the March quarter to be up by 2.7 per cent on a year ago – a 3-year high. The consumer confidence figures have implications for retailers, and other consumer-focussed businesses. The data on wages highlights the costs faced by businesses and gives insights into future interest rate decisions.

What does it all mean?

There weren’t big handouts in the budget but there also weren’t any major nasties. So consumer confidence was little-changed in the month. But it is probably better to describe the reaction as more mixed. Yesterday’s ANZ-Roy Morgan weekly consumer sentiment index was actually up 1 per cent and it was the fifth straight increase. Aussie consumers are feeling OK, not euphoric. Higher petrol prices and a weaker Aussie dollar would be some of the major concerns at present. But Westpac noted that reaction to the budget was the best since 2010.

Received a bonus payment over recent months? If you did, then you are faring far better than workers in less prosperous firms and industries. Including bonuses paid by employers, wages were up 2.7 per cent over the year. Excluding bonuses, wages lifted by 2.1 per cent. Company profits are at record highs and it is clear that those employers that are doing well want to keep their staff happy in a more fluid job market. Employment has been strong over the past year and it is clear that businesses have been more focussed on holding on to their most productive staff.

The Reserve Bank will clearly have more to say on the distinction between regular earnings and overall remuneration. The lift in bonus payments does explain why consumer spending has remained firm. Although bonuses are just that – non-guaranteed payments made when times are good. So they won’t have the same impact on inflation as a more permanent lift in wages.

Most states and territories are recording real wage growth – wages ahead of inflation. Western Australian wages only lifted 1.5 per cent over the year but annual inflation was just 0.9 per cent.

What do the figures show?
Consumer confidence

The Westpac/Melbourne Institute survey of consumer sentiment index fell by 0.6 per cent to 101.8 points in May. The index remain above its long-term average of 101.5 points. A reading above 100 points denotes optimism. The survey was conducted from May 7-12. (Yesterday the ANZ/Roy Morgan consumer sentiment index was reported as rising for the fifth straight week, up by 1 per cent.)

The current conditions index fell by 2.7 per cent to 102.1 points, but the expectations index rose by 0.9 per cent to 101.6 points.

Three of the five the components of the index increased in May:

* The estimate of family finances compared with a year ago fell by 6.5 per cent;

* The estimate of family finances over the next year rose by 0.5 per cent;

* Economic conditions over the next 12 months rose by 3.4 per cent;

* Economic conditions over the next 5 years fell by 1.4 per cent;

* The measure on whether it was a good time to buy a major household item rose by 0.2 per cent.

Housing outlook: A good time to buy a dwelling? The index fell by 2.8 per cent in May but is up by 12.3 per cent from a year ago. And house price expectations fell by 0.5 per cent, abd are down by 6.4 per cent on a year ago.

Unemployment expectations: Unemployment expectations fell by 4.5 per cent in May to 7-year lows, and are down by 11.5 per cent over the year.

Special question in May: “What impact do you expect the Budget to have on your family finances over the next 12 months?”

“Responses indicate the Budget was relatively well-received. Just over 10 per cent of consumers expected the Budget to improve their finances; 58 per cent expected no change; 19 per cent expected it to worsen their finances and 13 per cent reported ‘don’t know’. While the overall balance is negative (the net improve/worsen reading of –10 per cent for those with a view) it is much less negative than last year (a net –29 per cent) and the ‘best’ response we have seen since we began running this question in 2010.”

Wage price index

The wage price index rose by 0.5 per cent in the March quarter after a 0.5 per cent rise in the December quarter. Annual wage growth remained steady at an 18-month high of 2.1 per cent.

Private sector wages rose by 0.5 per cent in the March quarter while public sector wages also rose by 0.5 per cent. Annual growth of private sector wages was unchanged at 1.9 per cent. Annual growth of public sector wages eased from 2.4 per cent to 2.3 per cent.

Including bonuses (ordinary time hourly rates), wages rose by 0.6 per cent in the March quarter to be up by 2.7 per cent on a year ago – a 3-year high.

Industries with fastest annual wage growth: Health Care & Social Assistance (up by 2.7 per cent); Arts & Recreation Services (up by 2.5 per cent); Other Services and Education & Training (both up by 2.4 per cent) and Manufacturing and Public administration & safety (both up by 2.2 per cent).

Industries with slowest annual wage growth: Mining (up by 1.4 per cent); Retail Trade (up by 1.5 per cent); Rental, hiring and real estate services (up by 1.6 per cent).

Annual wage growth across States & Territories: NSW, 2.1 per cent; Victoria, 2.3 per cent; Queensland, 2.2 per cent; South Australia, 2.1 per cent; Western Australia, 1.5 per cent; Tasmania, 2.3 per cent; Northern Territory, 1.1 per cent; and ACT, 2.0 per cent.

In terms of real wage growth, doing best is Western Australia with wages up 1.5 per cent over the year, ahead of 0.9 per cent inflation. In Queensland, wages are up 2.2 per cent versus 1.7 per cent inflation.

What is the importance of the economic data?

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.

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).

What are the implications for interest rates and investors?

The wage picture is a little more complicated than commonly perceived. Company profits have been rising to record highs, as evidenced by the last earnings season of listed companies as well as company tax collections. Some of the profits have been paid out as higher dividends, some have been re-invested in the business and some have gone to employees. Over the past four quarters, wage increases, including bonuses, have been 0.6-0.7 per cent a quarter. Annual growth has been averaging 2.6 per cent.

The Reserve Bank will be heartened that consumers are getting extra funds to maintain spending patterns and pay off debt. But there still are scant signs that an inflationary break-out is imminent. Still, encouraging unemployment expectations are at the best levels in seven years.

CommSec doesn’t expect a change in interest rates until at least the December quarter. More likely, the Reserve Bank will delay lifting rates until early 2019.

Published by Craig James, Chief Economist, CommSec
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