Here's the handbrake on Australia's economic transition nobody saw coming

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Australia’s growth in employment has been so strong that more Australians are in work than ever before.

But that jobs growth has been associated with a wage growth “shock” which has seen Australia with a surprising slowdown in wages growth.

Australia is not alone, says the ANZ’s co-head of Australian Economics, Felicity Emmett. In the ANZ’s latest Quarterly Research note, Emmett wrote:

Low wage growth is a world-wide phenomenon. Throughout the latter part of the recovery in developed countries, it has surprised on the downside even in economies where labour markets have been tightening. But in the context of OECD economies, the extent of the slowdown in wage growth in Australia has been surprising.

What’s behind the low wages growth is Australian businesses searching for competitiveness on a global basis.

“Many of the factors depressing wage growth are likely to continue,” Emmett said because this slowdown is “necessary to lower Australia‚Äôs real effective exchange rate and boost the competitiveness of Australian goods and services”.

That’s important because of the impact on household spending, consumption and retail sales.

“Without a stronger recovery in consumption, an improvement in non-mining business investment is some way off,” Emmett wrote.

That means today’s retail sales release for May is a key part of the puzzle. We get the latest read on retail sales at 11.30am AEST today and the market is expecting a rise of 0.5% after the previous month’s extremely disappointing result which showed no growth on the month.

This is crucial to the economic recovery, Emmett’s colleague Justin Fabo told Business Insider.

“Aggregate household income growth has been weak, partly due to weak wages growth but also due to the composition of jobs growth being less supportive of income (i.e. fewer well paid mining jobs but more lower paid services jobs),” Fabo said.

He noted that the fall in the savings rate had cushioned the economy so far from impact of weaker wages growth and this was likely to continue “for some time in our view, particularly if household wealth continues to rise solidly”.

But in the end this would slow and the ANZ expects “overall household consumption growth to remain below average for a while yet amid this weak income growth and notwithstanding some further dissaving”.

Low wages growth and the composition of employment are a shock to the Australian public which, that after decades of strong rises, didn’t see it coming. It has hurt confidence and changed behaviours.

So far however, households have been doing their part and “dis-saving”, but the big question on the RBA and economists minds is, can consumption hold up enough to get business investment going again?

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