Of all the business indicators in Australia, few are as influential as the National Australia Bank’s (NAB) Business Confidence survey, especially the quarterly report which is larger and more in depth.
It was released last week, and if the details on labour market conditions are anything to go by, it points to the likelihood that wage pressures and economic growth may start to accelerate to levels that will allow the Reserve Bank of Australia (RBA) to begin lifting interest rates, according to Macquarie Bank.
“Our advice is ignore [the] NAB business survey at your peril,” the bank’s economics team wrote in a release late last week.
“Over the second half of 2017 firms reported a sharp increase in the availability of labour being a constraint on output… [with] 17% of firms at the end of 2017 reported that the availability of labour was a significant constraint on output, the highest share since September 2008.”
This chart from Macquarie shows the percentage of firms in the NAB survey that found it more difficult to find workers over the past 6 months, overlaid against movements in Australia’s unemployment rate.
Where reported skill shortages go, so too does the unemployment rate, at least from a historical perspective:
“This indicator has consistently been the best leading indicator of Australia’s unemployment rate for nearly three decades,” Macquarie says.
“The rise in the share of firms finding labour more difficult to get gels with the sharp fall late last year in the percentage of workers not expecting to lose their jobs this year,” it adds, pointing to this next chart below showing the share of workers not expecting to be with the same employer in one year due to shutdown or downsizing.
It too has a reasonable relationship to the unemployment rate, pointing to the likelihood that unemployment will continue to fall based on responses in the NAB survey.
Along with predicting that Australia’s unemployment rate will continue to fall, this third and final chart also bodes well for economic growth, according to Macquarie, showing the relationship between the NAB’s Business Conditions Index against annual growth in final demand excluding mining investment in Australian GDP.
“Firms’ perception of business conditions has historically been a good indicator of growth in demand,” it says, adding that “the high level of business conditions is flagging an improvement in final demand growth in coming quarters”.
“Alongside the strong global growth backdrop, the business surveys will give the Bank more confidence in its own forecasts for growth to pick up domestically.”
So based of the latest NAB survey, Australian unemployment is likely to fall, and GDP growth strengthen in the first half of 2018, an outcome that usually bodes well for growth in worker wages.
But this is 2018, and as we’ve seen in other major advanced economies over recent years, strengthening growth and falling unemployment has not necessarily lead to a noticeable pick-up in wage pressures.
Given this global phenomenon, Macquarie says its view remains it will take some time yet for wages growth to strengthen more than modestly.
However, while not the news millions of Australian workers wanted to hear, Macquarie thinks the deceleration in wage growth seen since 2011 has now likely bottomed.
“In the near-term we expect an improvement in Australian average earnings growth from the weak around 0.5% per annum in Q3 2017,” it says.
“Encouragingly, the NAB survey shows firms are expecting wage outcomes in enterprise bargaining agreements (EBAs) to average 2.6% over the next year, up from around 2.25% a few quarters ago.”
And with economic growth likely to accelerate in the coming years, Macquarie says a rate hike from the RBA remains a distinct possibility.
“We have been characterising the risks to our RBA call — first hike pencilled in for August this year — as skewed to a later ‘lift off’,” it says. “The run of data on the improvement in Australia’s labour market, however, is certainly food for thought.”
Markets will get a slew of important labout market data in the month ahead, starting with Australia’s January jobs report released on Thursday. That will be followed by Australia’s Q4 2017 wage price index on February 21 along with details on employee compensation in Australia’s Q4 GDP report released in early March.