Something strange is happening in Australia this year.
On one hand business confidence is soaring, hitting a pre-GFC high recently, according to the National Australia Bank’s (NAB) monthly business survey.
While business optimism is overflowing, the same can’t be said for consumers. They’re pretty downbeat compared to normal, whether measured by the weekly ANZ-Roy Morgan survey or the separate consumer sentiment index released by Westpac.
This excellent chart from the NAB shows the recent divergence between business and consumer confidence.
Chalk and cheese, Jekyll and Hyde or night and day — not matter how you choose to describe it, the recent trend is more than a little unusual.
The gap between the two is now at its widest since 2001, and there are few signs that it’s going to close anytime soon. Indeed, according to NAB’s economics team, the length of the divergence is now the longest that’s its been since Australia’s last recession in mid-1991.
So what gives? Australia isn’t in recession. Only yesterday we learnt that the economy grew again in the June quarter, extending Australia’s run without experiencing a technical recession to 26 years.
Recent labour market data has also been pretty strong, and homeowners in Australia’s southeastern capitals — where close to 50% of Australia’s population lives — have enjoyed an enormous lift in wealth courtesy of booming house price growth in Sydney and Melbourne since the global financial crisis.
Alas, even with those positives, Australians, collectively, remain down in the dumps.
That’s exactly what economists at the NAB have attempted to uncover in a research note released late last week.
The good news is that they think they know the answer: Australia’s lousy level of wage growth, along with elevated levels of unemployment.
“Our reading of the economic literature finds four variables can consistently explain trends in consumer confidence around the world: Unemployment, Wages, Equity Prices and Real House Prices,” it says.
“For Australia, these variables explain around 63% of consumer confidence through time — a high level of explanatory power.”
Based on modelling conducted by the NAB, it found that of the four factors that drive changes in consumer confidence globally, perceptions towards wage growth and unemployment levels have been the major factors behind the recent decline.
“Subdued wages growth is detracting from the average level of consumer confidence, along with the unemployment rate,” it says.
“Interestingly, equity prices and real house prices are not contributing as much to consumer confidence as they had in the past — likely reflecting diverging houses price trends with recent house price growth concentrated in Sydney and Melbourne and the underperformance of the ASX.”
So the good news is that we know the answer. However, the bad news is that the NAB thinks it will still be some time until Australia sees a meaningful lift in wage pressures.
“We have previously noted that wages growth is unlikely to pick up until inroads are made into elevated unemployment and underemployment,” it says.
There are hints that wages growth is starting to stabilise and the recent rise in the minimum wage should also start to see a lift in wages growth in Q3.
“As wages growth starts to lift, so should consumer confidence.”
The NAB modelling suggests that weak wage growth alone has lopped a whopping 10% off Australian consumer confidence since the global financial crisis. In order to reverse half that decline, it estimates that annual wage growth — currently running at 1.9% — would need to lift to 3% per annum in the period ahead.
Both the federal government and Reserve Bank of Australia think that wage pressures will build in the years ahead, and in the case of the former rapidly, but we’ve been told that before only to see the opposite happen in reality.
The research from the NAB underlines just how important upcoming labour market data will be in determining the outlook for wage and inflationary pressures, the performance of the broader Australian economy and the outlook for official interest rates.
How it performs will almost certainly determine what will happen next.