Australian business conditions remain stronger than at any point since the global financial crisis, according to the latest National Australia Bank business survey.
However, at the same time, consumer confidence, as measured by the ANZ-Roy Morgan weekly survey, remains stuck in the mud with concerns over the outlook for the economy and household finances continuing to weigh on their minds.
It’s little wonder why Australians are feeling a little glum.
Businesses are benefiting from strong trading conditions, helping to boost profits, but that’s yet to filter through to household finances, which are under pressure from high levels of indebtedness, low wage growth and higher utility prices.
In terms of Australia’s economic outlook, something’s gotta give.
Strong business operating conditions can’t last unless they deliver a windfall to Australian households.
Consumers, after all, are the customers of businesses.
Well, thanks to ongoing strength in business profitability, salvation may be at hand for workers.
After perusing the NAB’s August report, something immediately stands out. The survey’s employment measure — an indication on the likely pace of hiring in the period ahead — soared, rising to +11, near the highest levels on record.
Although this is only a sentiment indicator on what firms plan to do, not what they actually do, it must be remembered that the survey dates back two decades, including during the halcyon days seen before the global financial crisis.
It also has a strong relationship to hiring levels reported in the ABS’ monthly employment survey.
On those grounds alone, the August result is more than noteworthy, providing further evidence that an improvement in the broader Australian economy may lead to an even faster acceleration in employment growth.
And, should past relationships between the NAB and ABS series be maintained, it points to the likelihood that Australian unemployment levels will continue to push higher.
“The employment index jumped 4 points to +11 index points, which is well above the long-run average for the series and not far from record highs,” the NAB said.
“This outcome points to an annual job creation rate of around 270,000, or around 22,000 per month, which is sufficient to see the unemployment rate push lower [with participation rates remaining unchanged].”
Fitting with recent ABS data, the NAB said that a majority of sectors indicated that they intend to lift staffing levels as a whole, with retail the only industry to indicate that employment levels were likely to be reduced.
So the NAB survey is pointing to the likelihood of a broad-based pickup in employment growth.
While few Australians will disagree than more people in employment is good thing, it’s also clear from recent consumer sentiment indicators that strong jobs growth, in isolation, isn’t enough to lift the spirits.
What workers really want to see is a rebound in wage growth, and not by a little but a lot.
In an era where many feel that they’re going backwards after inflation is taken into consideration, there’s nothing like a big pay increase to fuel the animal spirits.
While recent history underscores why few remain optimistic that such a scenario will occur — many, including the RBA, have constantly predicted a pickup in wage pressures only to be disappointed by reality — the NAB survey also had some welcome news on those hoping for a pay rise.
It’s labour cost index — a quarterly measure on the wage bill of Australian businesses — rose by 1.2% in August, an increase from 0.7% in July, leaving it at the highest level since early 2014.
Although that could reflect the recent 3.3% increase in Australia’s minimum wage rate that kicked in at the start of July, it also hints that strengthening labour market conditions may be finally starting to filter through to wage pressures.
Hiring levels have now been strong since the beginning of the year, and while there’s still an abundance of workers who are wither unemployed or in a job but looking for more hours, it suggests that an improvement in the broader Australian economy may be starting to translate to skill shortages in some sectors, helping to boost wage growth.
In a speech delivered last week, Reserve Bank of Australia governor Philip Lowe noted that he has seen evidence that in industries “where the demand for labour is strong, wages are increasing a bit more quickly than they have for some time”, adding that “the RBA’s central scenario is that, over time, this will become a more general story”.
While it’s far too early to declare that we’re about to see a strong and sustained increase in wage pressures in the years ahead — one only has to look at the evidence from other advanced economies in recent years where strong labour market conditions have failed to lift wage growth by any meaningful manner — things are looking more promising than at any point in recent years.
The economy is strengthening and the labour market, as a lagging indicator, is now starting to catch up.
Should those trends be maintained in the coming quarters, it will only add to view that wage growth bottomed in the second half of last year.
Leading labour market indicators such as the NAB survey, along with alternate vacancy and job ads data, suggests that is likely to take place.
If wage growth has bottomed, the question will naturally turn to how much will it increase in the years ahead?
While few expect a rip-roaring recovery back to the levels seen before the global financial crisis, the scale of any pickup will largely be determined by the success in reducing the nation’s underutilisation rate, currently 14.4%.
A percentage point or two off that rate will only help to bolster confidence that wage pressures will increase.
Markets will get further information on that front later this week with the ABS scheduled to release Australia’s August jobs report, including quarterly unemployment and underutilisation rates.
A further improvement in those measures will almost certainly get the markets excited about not only a lift in wage growth, but also the prospect of an earlier-than-expected RBA rate hike.
The August jobs report will be released at 11.30am AEST on Thursday, September 14.
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