Australia’s labour market has been on fire in 2017 in terms of pure employment growth.
According to figures from the Australian Bureau of Statistics (ABS), 251,000 Australians found work in the six months to August, the largest increase over a comparable period since July 2000.
That was just before the world’s eyes turned Down Under for the Sydney Olympics.
An average of 41,800 people finding work each and every month is a very impressive statistic any anyone’s language.
Making that figure even more mind-boggling, the vast majority of those jobs have been full-time, averaging 35,300 per month over the same period.
In June and July, the cumulative six-month increase in full-time employment has come in above 200,000, the fastest pace of growth in the near 40-year history of the labour force survey, and again, a statistic that suggests the Australian economy should be doing alright.
However, despite the rollicking increase in predominantly full-time employment over the past six months, the Australian economy, at least in terms of GDP growth, has been fairly disappointing of late.
According to the ABS, GDP grew by just 1.8% in the year to June, equaling the post-GFC low set in previous quarter.
Not exactly stellar, particularly compared to what Australians have become accustomed to.
While weather disruptions played a part in this slowdown, impacting both domestic activity and commodity exports, part of the slowdown also reflects a moderation in household consumption, the largest part of the economy.
Years of weak incomes growth has left its mark, with spending only propped up recently by a sharp draw down in the amount households are saving.
Spending is growing slower than before the GFC, even with a noticeable lift in Australian population growth.
The most important cog in the Australian economy has certainly been stronger than is currently the case, as seen in the chart below from Capital Economics, which shows the annual change in real household consumption compared to disposable income.
The question now is what will happen next?
On the surface booming employment growth should provide a boon to the broader Australian economy. More jobs equals more income which should mean more increased household spending, at least the theory goes.
However, while strong employment growth, if sustained, bodes well for the outlook for household spending, Paul Dales, chief Australia and New Zealand economist at Capital Economics, doesn’t think that it will provide the silver bullet to spur on a steep increase in consumption.
“We doubt employment growth will be able to drive income growth much higher,” he wrote in a note released earlier this week. “Indeed, we expect employment growth will only add around 1.4 percentage points to real income growth in 2017 as a whole.”
Real income growth reflects nominal income growth less inflation.
Dales says that despite booming employment growth, real incomes will not be helped by wage growth being wiped out by inflation.
“Wages are on track to add almost nothing and the drag from inflation will probably increase,’ he says. “That suggests, after increasing by 2.3% in 2016, real incomes will rise by just 1.0% this year.”
This chart from Capital Economics shows its forecasts for real household income growth on an annualised basis, breaking down the contribution by hours worked, employment growth, wage growth, other income, along with the drag coming from inflation.
Dales says weak real incomes growth will likely see consumption growth slow from 2.6% to around 2.0% by the middle of next year.
“The falls in retail sales values in July and August suggest this slowdown is already underway,” he says.
Looking ahead, Dales expects that real income growth and consumption will start to accelerate next year on the back of a modest pick-up in
wage growth. However, he expects that it will still remain stuck below 2% per annum well into 2019, keeping a lid on spending levels.
“We expect some pick-up to around 2.5% in 2019, but even this would still be well below the long-run average rate of consumption growth of 3.5%,” he says.
And with the largest component of the economy likely to remain weak for some time yet, it comes as little surprise that Capital Economics doesn’t think the Reserve Bank of Australia will consider lifting interest rates until at least 2019.