Why wage growth and cost of living pressures look set to dominate Australia's next election campaign

Picture: Getty Images
  • Historically, there’s been a reasonable relationship between job security fears and consumer confidence in Australia.
  • Recently, and despite strong jobs growth in 2017, confidence levels remain subdued.
  • Weak wage growth and cost of living pressures may explain the recent disconnect, laying the potential battlegrounds for the next federal election.

If you’ve ever wondered why Australia’s politicians bang on about their focus being on delivering “jobs and growth”, this chart goes someway to explaining it.

Source: Commonwealth Bank

From the Commonwealth Bank, it looks at the relationship between job security fears and consumer confidence based on data contained in the monthly Westpac-MI Australian consumer sentiment report.

Without the need for bringing in yet another focus group, it’s clear than when Australians are feeling more secure in their jobs, they tend to be a lot more confident.

Recently, on the back of record employment growth in 2017, Australians are feeling a lot more confident towards the outlook for labour market conditions with Westpac’s unemployment expectations index sliding to a fresh multi-year low.

A lower reading indicates more Australians think unemployment will fall in the year ahead.

In the past, this was usually a good omen for Australian economic growth.

As the theory goes, improved job security should lead to higher levels of confidence. And if more Australians are feeling confident, they’ll be more inclined to spend. And if that takes place, the economy should do well given household spending accounts for around 60% of GDP.

Jobs and growth, therefore, are an important piece of the puzzle when it comes to not only the outlook for the Australian economy, but also the reelection chances of politicians.

However, even with slightly lower unemployment and strong employment growth, Australians still feel fairly subdued about themselves in early 2018.

Yes, there are currently more optimists than pessimists, but only by a slim majority, with current sentiment levels well below the levels seen either side of the financial crisis.

To John Peters, Senior Economist at the Commonwealth Bank, the lack of pickup in sentiment likely reflects cost of living pressures.

“Ongoing feeble wages growth, ever rising living costs such as electricity prices, and mountainous household debt, appear to be the big picture issues continuing to give consumers the jitters,” he says.

“Not even recent sustained and robust jobs growth is boosting consumer spirits.”

Peters says this could reflect ongoing pessimism surrounding the outlook for wage growth, potentially creating headwinds for the economy as consumers remain cautious when it comes to spending.

“There appears to be no imminent light at the end of tunnel for workers in terms of escaping the most feeble wages growth environment in decades, despite strongly growing employment in late 2017 and early 2018,” he says.

“These latest sentiment readings do not signal that a near-term substantive and sustained pickup in household spending is in the offing.”

So even with strong jobs growth, economic growth could remain hamstrung by cost of living pressures.

And at the epicentre of that problem is persistently weak wage growth, especially for private sector workers.

Given that consumer sentiment remains subdued, even with over 400,000 jobs created last year, don’t be surprised if the next election slogan morphs from “jobs and growth” to something along the lines of “pay rises and lower taxes”.

On recent evidence, the two major parties already appear to be well on the way.

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