Reserve Bank economic growth
Reserve Bank Governor Philip Lowe

It says much about the way the economic goalposts have been shifted that yesterday’s June quarter national accounts were held by many in the media to be some sort of boom, as if 2.9% growth in 2017-18 is an economy firing on all cylinders. It was certainly better than the budget forecast of 2.75%, but its composition highlights issues that are likely to strike a raw nerve at the Reserve Bank.

Here’s what RBA governor Philip Lowe said on Tuesday in Perth:

Wages growth has been quite low recently. For some time my view has been that some increase in aggregate wages growth would be a welcome development, especially if it is backed by stronger productivity growth. Many business people that I speak to recognise that a pick-up in overall wages growth would be a positive development from a macro perspective, although not from the perspective of their individual business … Firms are currently reporting a record number of job vacancies and increasingly telling us that it is hard to find workers with the right skills. One way of dealing with this increasing tightness in the labour market is, of course, to lift wages.

And yesterday’s numbers had an ostensibly encouraging story on what the Australian Bureau of Statistics calls compensation of employees (CoE): up 0.7% in the three months to June and 4.8% through the year. Except, CoE is the amount of money paid to employees in aggregate, so if employment increases but average wages stay the same, CoE rises. As the ABS pointed out: “seasonally adjusted COE increased 0.7% in the June quarter 2018 with average compensation per employee increasing 0.1%. This indicates growth in employees is outgrowing wage rates.”

In the year to June, average CoE grew 1.4%, faster than the 0.2% seen in 2016-17, but less than half the rate in 2013-14 of 2.9%. With the consumer price index (CPI) running at 2.1% in the year to June, Australians workers suffered a sharp cut in real wages, based on this metric. 

But the key driver of the strong GDP result, after government spending, was household demand. If workers are going backwards on income, where did that come from? From our savings. The household saving ratio fell to 1.0% in the June quarter, the lowest since December 2007. Back then we were spending like there was no tomorrow as a result of a mining boom, ~4% unemployment, tax cuts and surging house prices — enough that the Reserve Bank notoriously raised interest rates during the election campaign. Then the financial crisis hit and everyone panicked. The savings ratio surged to 10% as consumers took fright. 

Now it’s back down to 1%, and it’s not because households are enjoying a wealth effect and living large, but because they haven’t had a real wage rise of note for years. The fall in the savings ratio has been particularly pronounced as wage stagnation has set in — it was 5.3% in the March 2017 quarter, less than 18 months ago. 

And remember some of the excuses trotted out for wage stagnation business and Scott Morrison? One was that companies needed to become more profitable before there could be wage rises. But companies enjoyed an 11% rise in profits in 2017-18 (on top of a 21% surge in 2016-17) while real wages for private sector workers fell. Another was the need for productivity growth. As the National Australian Bank’s economics team pointed out yesterday, the June numbers showed that “[g]rowth in productivity outpaced that of wages, which saw unit labour costs fall for the second quarter in a row … unit labour cost growth … continues to be weak and is tracking at well below growth rates consistent with inflation of 2.5%.”

With high household debt, house prices falling in Sydney (down 5.6% in the past year and Melbourne (down 1.7% and accelerating) and no sign of wages growth, it’s no wonder the RBA is ignoring idiotic demands for a rate rise from The Australian Financial Review’s tower of privilege. As AMP chief economist Shane Oliver noted this morning, factors such as “the combination of a slowing housing cycle, constraints on consumer spending and still subdued business investment will likely see growth slow going forward to around 2.5-3%. As a result, spare capacity is likely to remain significant, keeping wages growth and inflation low. We don’t expect the RBA to start raising rates until late 2020 at the earliest and the risk remains significant that the next move could be a cut.” 

Not quite a boom, eh?

Peter Fray

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