There’s an unusual trend in the Australian economy – businesses are feeling great, but regular folk are feeling down in the dumps.
The gap has been widening and becoming more pronounced, and largely due to a simple reality: companies are making solid profits but people’s wages are going nowhere.
This morning’s poor reading from Westpac/Melbourne Institute consumer confidence index continued the recent soft run of consumer data.
The index fell to 95.5, down 1.2% from the previous month and now sitting at its lowest level since July 2015.
That can be contrasted against NAB’s monthly business survey yesterday which showed that business conditions continued to strengthen, rising by another point in July to a reading of +15.
The net result is that the gap between consumer and business sentiment continues to widen, as this chart from ANZ shows:
The NAB survey showed that Aussie businesses are now feeling more optimistic than at any time since the global financial crisis in 2008.
Furthermore, a 15 reading is three times the series’ long-run average of +5.
Underpinning that confidence is a continuing improvement in trading conditions and higher profits.
This table provides a 3-month trend summary of the key areas which comprise the NAB monthly business survey. Note the strong increase in profitability:
There’s been consistently strong growth in corporate profits, but the evidence suggests that isn’t filtering through to higher wage growth for employees.
What’s interesting is that Australia seems to be rather unique among global consumers.
While the theme of continuing low wage growth is evident across other developed markets including the US and the UK, Aussie consumers appear to be even more downbeat.
This chart from JP Morgan shows how Aussie consumer sentiment compares to the global standard, and the recent divergence is clear:
The driving factors appear pretty simple: low wages growth at a time of apparent economic strength rebuilding, as well as “bill shock” from rising energy prices and banks increasing the costs of loans.
It’s an issue Business Insider’s David Scutt covered last month, when he analysed the recent sharp divergence between profits and wages as a share of GDP.
Research from Commonwealth Bank revealed that corporate profits have grown to 20.4% of GDP this year while wages’ share has fallen to 15.5% — the lowest level since 2009.
Here’s the chart:
The sharp recent divergence clearly illustrates that something has changed, and the shift has been particularly noticeable over the last couple of years.
ANZ senior economist Jo Masters said the gains in corporate profits should continue to support employment growth.
“Elevated business confidence and conditions, and importantly the profitability measure (that has a stronger relationship with employment), should support ongoing employment growth,” Masters said.
“We do expect a moderation in the pace of employment growth from the first half of the year to around 15-20k per month.”
The recent strength in employment data has provided a more favourable backdrop for consumer sentiment, with ANZ’s weekly consumer index picking up off its May lows.
However, one could argue that the key question is not so much whether corporate profits will translate into more employment, but higher wage growth for workers.
AMP chief economist Shane Oliver expects the recent split between corporate profits and low wage growth to continue, suggesting that Australia is likely to follow the US in that regard.
“It has persisted for a long time in the US so I suspect that it will continue to persist for a while yet in Australia,” Oliver said.
Back in March, research from Deutsche Bank framed the discrepancy between average earnings and wages within the context of Australia’s terms of trade.:
Once again, an obvious divergence from what was previously a highly correlated indicator. The results showed that the pickup in Australia’s exports didn’t filter through to people’s hip pocket.
Masters said that the high degree of slack in the labour market meant that ANZ’s forecast is for wage growth to remain gradual.
“We see only a very gradual lift in wage growth, mainly because we expect only a very gradual down-drift in under employment,” Masters said.
“Plus, growth in 2018 is likely to be less labour intensive (given the slowdown in housing construction and rise in LNG exports) and there’s the issue of job insecurity.”
RBA governor Philip Lowe recently spoke about how an increasing perception among workers that their jobs could be under threat from automation or global competition could be keeping a lid on wages.
Factoring in that Australia’s terms of trade were boosted by a surge in commodity prices earlier this year, the evidence is still clear that wage growth hasn’t kept up with either company earnings or recent economic growth.
This is readily apparent to Australian workers, with national wage growth stuck in a steady decline since 2012.
Those falls have been even more pronounced in the private sector, with the most recent data showing annual wage growth in the private sector of just 1.9%.
It’s difficult for Aussie consumers to express much positive sentiment when annual wage growth is tracking beneath headline inflation, with CPI figures for June coming in at 2.2%.
Outside of employment, high house prices and cost of living pressures form the recent increase in electricity prices are also contributing to consumer’s pessimistic outlook.
If consumer sentiment continues to languish, it could pose a difficult challenge to policy makers who are reliant on domestic consumption as a key driver of Australia’s economic growth
ANZ’s Masters said that despite steady growth this year in employment and retail sales, the bank remains cautious on the capacity of the Aussie consumer to contribute to growth in the face of multiple headwinds.
“We are cautious about the outlook for consumption. Households continue to face a number of headwinds – subdued wage growth, slower growth in house prices and high household indebtedness – which will likely cap the rise in consumer sentiment,” Masters said.
“In addition, higher energy prices will weigh on households’ disposable incomes. As such, we remain cautious about the outlook for consumer spending despite the solid Q2 retail sales outcome.”
Weak consumer sentiment tends to lead weak consumer sector outcomes. And with consumption being well over half of all Australian economic activity, that is a drag on the growth outcomes that the Turnbull government so dearly wants to foster.