This chart issued by Deutsche Bank’s economics team following Australia’s GDP data last week tells a revealing story about the state of the national economy right now.
It shows the terms of trade – the value Australia gets for its exports versus what it gets for its imports – against pay growth. (When the terms of trade goes up, Australia’s getting more money for what it sells.)
It clearly demonstrates that, in the short term at least, that big surge in the relative value of our exports has had zero impact on what’s landing in people’s pockets.
It also shows that historically, a lift in the terms of trade tends to mean better wages growth.
A breakdown in correlation – what chart nerds call a divergence – in the latest quarterly inputs to a set of data stretching back decades does not necessarily mean that the relationship is broken. Wages should be expected to tick up, eventually, if even just a bit of the lift in the terms of trade is sustained over the coming quarters. But for now, that isn’t happening and the gap that has opened up is breathtaking.
There are two important mitigating factors to consider:
- Commodity markets have gone a little bonkers. Nobody serious was forecasting iron ore and coal prices at the levels they reached late last year. Most analysts are expecting a drop in iron ore prices in the year ahead. The market action has amplified the boost to the terms of trade.
- The business cycle doesn’t move as fast as markets have. It doesn’t make sense for companies to shower wage increases on staff when they’ve just enjoyed a few months. Most pay reviews are annual and big increases in profitability take time to filter through in terms of pay allocation on company budgets.
But this apparent divergence comes as the wages and salaries of Australians have taken a central place in political debate. And not before time.
Wages growth has been tanking in post-mining-boom Australia for a decade, and a couple of weeks ago we found that growth in private sector wages had found another all-time record low.
There is an accompanying pattern emerging in recent economic data, however, that is similarly troubling. While wages growth has continued to plumb abysmal levels, businesses are reporting that things are dandy. Look:
In a note themed “a business / consumer disconnect” Deutsche Bank’s chief economist in Australia, Adam Boyton, notes (emphasis added):
… the national accounts data is consistent with the gap that has opened up between measures of consumer and business confidence / conditions. Typically we would view the risks as being that the business sector ‘corrects’ to the consumer sector – i.e., the latter tends to lead. The weakness in household sector incomes also poses a risk that the robust household consumption outturn seen in Q4-2016 is not repeated.
With consumption accounting for well over half of all economic activity in Australia, Boyton is highlighting an important feature of the Australian economy in normal times — if consumers are feeling good, then businesses will start to feel a bit better about everything too, because people will be spending.
But that is not the case here. Business sentiment has been surging but consumer sentiment is treading water. Something is out of whack.
Consumption growth is helpful because, as the largest component of GDP, it can smooth out some of the cyclical shocks. But to have consumption growth, you need wages growth.
Federal treasurer Scott Morrison says this year’s budget will be about laying a platform for growth. Writing for Business Insider following the GDP result last week, he said (emphasis added):
Of concern in these accounts is that compensation of employees declined by 0.5 per cent in the quarter, but was up 1.5 per cent higher through the year. While we saw more jobs in the quarter, with modest wage increases and compositional changes this quarter’s result was disappointing.
This is why the core task remains to increase what hard working Australians can earn. This means generating more hours and more jobs in our economy. You can’t achieve this outcome without growth and business investment.
You can’t get a job in a business that is closed or not hiring. You can’t get a pay rise in a business that is not earning a profit.
There’s one final important step in the process, however. Companies — especially the very large employers that are earning healthy profits — need to make decisions to lift real wages.
Underemployment is still relatively high in Australia, meaning companies have ready access to a pool of people looking for work. It’s the kind of environment where it’s easy to keep wage increases low.
The Coalition government isn’t the type to tell businesses what to do with their money, but perhaps it’s time for a change in tone. Government can incentivise pay increases through tax settings, but they can also apply broad political pressure, too, and encourage delivery of pay increases to workers, so the community can see they are getting a share of the growth that the Turnbull government has been crowing about.
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