One of the biggest talking points in business circles right now is the disconnect between business confidence and consumer sentiment.
As wage growth remains low and Australian households deal with high levels of mortgage debt, consumers remain glum in their outlook towards the economy.
Meanwhile, Australian businesses are increasingly buoyant. As a case in point, the monthly NAB business survey earlier this week reported the strongest operating conditions since 2008.
To reconcile the discrepancy, Deutsche Bank chief economist Adam Boyton took a closer look at the employment sub-index in the NAB business survey.
He found that while business conditions are soaring, labour cost figures in the NAB survey are actually tracking on a similar level to consumer sentiment readings:
The chart shows the quarterly growth rate in labour costs, mapped against the level of consumer sentiment one year earlier.
It reveals that the labour cost measure in the NAB survey actually tends to lag consumer sentiment — and consumer sentiment is falling.
“This tells us we actually shouldn’t get excited at all by the apparent lift in labour costs as reported in the NAB survey as it is simply following the earlier small increase in consumer sentiment which has now largely stalled,” Boyton said.
“It also suggests that further increases in the NAB labour costs measures may be unlikely – at least in the absence of a lift in consumer sentiment.”
The analysis is reflective what appears to be a key change underway in the Australia economy – businesses are profitable and hiring staff, but wages aren’t climbing.
In terms of which economic measure provides the best forecast of Australia’s near term economic growth — strong business conditions or weak consumer sentiment — Boyton is picking the latter.
“As far as our monetary policy views are concerned we will take our lead from the consumer surveys,” he said.