Households remain a “significant risk” when it comes to the outlook for the Australian economy.
That’s the main talking point to come from the minutes of the Reserve Bank of Australia’s (RBA) December meeting minutes released today with the bank striking a noticeably more downbeat view on what is the largest and most important part of the Australian economy.
“Growth in consumption was expected to have slowed in the September quarter and the outlook for household consumption continued to be a significant risk, given that household incomes were growing slowly and debt levels were high,” the minutes read, foreboding the paltry 0.1% increase in household consumption in Australia’s September quarter GDP report which was the weakest outcome since the global financial crisis.
“Information on components of household consumption indicated that growth in aggregate household consumption had moderated in the September quarter,” the minutes said.
“Growth in retail sales volumes and motor vehicle sales to households had been subdued.”
The assessment from the board was far more downbeat than that offered one month earlier when it said that “the outlook for consumption growth depended on the outlook for household income growth, which remained uncertain”.
Perhaps creating more uncertainty on the outlook for consumption, and going someway to explaining the bank’s more downbeat view on household spending, the board spent considerable time discussing why strong labour market conditions — both in Australia and abroad — were failing to lift wage and inflationary pressures by any significant degree.
“Members commenced their discussion of the domestic economy by noting that the wage price index continued to suggest that wage growth had been stable at a low rate,” the minutes read.
“The outcome for the September quarter had been slightly lower than expected, despite the 3.3% increase in award and minimum wages in the quarter, as previously determined by the Fair Work Commission.
“This had occurred at the same time as spare capacity appeared to have declined and more firms had been reporting difficulty finding suitable labour,” it added.
Adding to uncertainty as to whether a further improvement in Australian labour market conditions will help to build wage pressures to any significant degree, the board also discussed the disconnect between labour market conditions and wage growth in other advanced economies in recent years.
“Conditions in labour markets in a number of major advanced economies had continued to tighten. Employment-to-population ratios had increased and unemployment rates had declined to low levels in Japan, Germany and the United States, among other advanced economies. Members noted that this implied there was limited spare capacity in these economies, based on conventional measures of full employment,” it said.
“However, wage growth had picked up only slightly.
“While observing that there were typically lags between labour markets tightening and wage pressures emerging, members noted that the wage data might suggest these economies had more spare capacity than implied by conventional measures.”
As it has done in the past, the bank pointed to technological change and the evolving nature of work as factors that may be placing downside pressure on wages, adding that “not everyone was benefiting equally from the recent strength in labour demand”.
This conundrum — strong labour market conditions co-existing with weakness in wage growth, inflationary pressures and household spending — also dominated the final paragraph of the minutes in which the bank discussed considerations for Australian interest rate settings.
“Over the prior year or so, the unemployment rate had fallen and inflation had moved closer to target. Members noted that this had occurred at the same time as risks in household balance sheets had lessened. Recent data had increased confidence that there would be further progress on these fronts over the following year,” it said.
“How far and when stronger conditions in the economy and labour market might feed through into higher wage growth and inflation remained important considerations shaping the outlook.”
That last line, in particular, is telling when it comes to the outlook for Australian interest rates.
When stronger labour market conditions, faster business investment, elevated commodity prices and improved global economic growth lead to a sustained pickup in wage and inflationary pressures, interest rates will almost certainly rise.
No one quite knows when that will occur, including the RBA board, but it’s clear it is looking abroad for clues as to what may happen locally.
“Members recognised that this combination of strength in economic activity and low inflation was a central issue in the global economy,” the minutes said.
“It was possible that this combination could continue for a while yet, but it was also possible that inflation could pick up by more than expected as spare capacity diminished.”
In other words, if they weren’t already, upcoming labour market, wage and inflation data will be key in determining what direction policy will head as we enter 2018.