Company profits in Australia have been running ahead of wage growth for some time, and it bodes well for a long-awaited pickup in wages next year.
That’s the view of Callam Pickering, Asia-Pacific economist at global jobs website Indeed, in the wake of quarterly business data released by the ABS this morning.
Q3 estimates from the ABS on profit growth and inventory levels among Australian companies revealed no big surprises.
The book value of inventory — which feeds into Q3 GDP data on Wednesday, rose by 0.2% in seasonally adjusted terms (beating forecasts of flat growth).
And the ABS’s measure of company profits actually dipped by 0.2% in the September quarter.
However over the last 12 months, the ABS data shows gross company profits have risen by 20% in seasonally adjusted terms. And Pickering said net earnings growth in that time has been a steady 6.5%.
Pickering’s analysis of today’s ABS data includes this useful chart, which at least partly explains the divergence in sentiment between businesses and Australian consumers:
The recent trend is clear — company profits are rising, while Australian households continue to suffer through an extended period of record low wage growth.
“It’s understandable that wage growth has lagged the improvement in business conditions. That’s quite normal,” Pickering said.
“But if businesses want to continue their recent run of success then more needs to be passed on to their employees.”
Pickering said an improvement in wage growth would actually benefit Australian business, due to the cyclical impact from an increase in consumption — which comprises around 60% of Australia’s economic growth.
“A healthy household sector has always been good news for the business sector but right now households are struggling under the weight of low wage growth and high debt.”
“If wage growth doesn’t improve then it is all but certain that business conditions will deteriorate, as they have in the retail sector throughout 2017.”
In view of the latest profit figures, it’s perhaps not surprising that Australian businesses are feeling upbeat.
Listed Australian companies indicated a willingness to boost investment in the most recent company reporting season, a view backed up by quarterly capex data from the ABS last week which showed the business investment outlook is strengthening.
And NAB’s monthly business survey — widely regarded as a key measuring stick of business sentiment in Australia — has seen views towards current operating conditions consistently hit record highs in recent months.
So it begs the question — will improving operation conditions for Australia companies filter through to higher wage growth? So far, that hasn’t been the case.
This table from the most recent NAB business survey illustrates the recent state of play. Company profits jumped by +9 points in October, while the reading for labour costs went backwards:
For his part, Pickering is confident that the gap between earnings and wage growth will close next year and says workers should back themselves in at the negotiating table.
“Improved business conditions and strong growth in corporate earnings and profitability paves the way for higher wage growth next year.”
“Workers should feel confident demanding higher wages and new employees shouldn’t hesitate to ask for a higher starting salary.”