Australia: Focus on confidence and the labour market - Westpac

In view of Elliot Clarke, Research Analyst at Westpac, the past week has had a focus on confidence and the labour market for Australia.

Key Quotes

“While confidence was unaffected, business conditions (as reported by the NAB business survey) surged in October to +21, a new all-time high. The gain was highly concentrated by sector (in manufacturing) and by state (in NSW); hence, the result is likely at least partly noise. It remains our belief that the NAB survey overstates current conditions, in part owing to the exiting of uncompetitive firms in some sectors, such as the auto industry.”

“Regardless, the survey continues to provide very helpful guidance on the mix of conditions across the economy (manufacturing and construction strong; consumer-centric sectors weak) as well as the state of the labour market. For employment, the NAB survey suggests that the current strong pace of gains will persist into year end. This is consistent with the October labour force release, see below.” 

“Given the mood of retailers, it is not surprising that after October’s ‘return to optimism’ (a reading of 101.4), Westpac-MI consumer sentiment again succumbed in November, falling back to 99.7 – below the 100 optimist/ pessimist divide. Whereas concerns over family finances have typically driven declines in confidence over the past year, in this instance it was renewed concern over the economic outlook. The ‘economic conditions, next 12 months’ index largely unwound last month’s bounce, falling 6.2%; meanwhile, the five-year outlook fell 2.2%. Both of these sub-components are likely to have been affected by political uncertainty over the ‘citizenship’ saga.”

“On consumer spending, it remains the case that lingering concerns over family finances are restricting demand. Perceptions of family finances did improve in the month, but they remain at below average levels despite continued strength in employment growth and a favourable mood amongst households towards the labour market overall. Having fallen back in November, ‘time to buy a major household item’ is currently 7% below average.”

“Each year, our November survey also provides colour on households’ Christmas spending plans. In 2017, spending plans are downbeat, with just under a third of consumers expecting to spend less than last year, and 54% the same; only 11% plan to spend more than last year. The overall result is marginally down on last year, implying a repeat of 2016’s lacklustre sales. On housing, the ‘time to buy a dwelling’ series did rise 3.4% in the month, but still stands 18% below average. Interestingly, in November, NSW improved as Victoria deteriorated; this follows an easing in house price growth in NSW as price gains held up in Victoria. Household’s views on the housing market are clearly being affected by perceptions of affordability and competition.” 

“One of the persistent concerns for households is weak wages growth. We, the market and the RBA were anticipating a reprieve in the September quarter, with the wage price index expected to gain 0.7% – supported by a known 3.3%yr rise in the minimum wage effective 1 July. Despite this positive impetus, the wage price index disappointed materially, coming in at just 0.5% in Q3 and 2.0%yr.”

“We estimate that, abstracting from the minimum wage effect, underlying wage growth in Q3 was likely around 0.3% – a very weak outcome. The weakness in wages remains broad based, with private wages up 1.9%yr and the public sector 2.4%yr. Within the private sector: the strongest performing industries were arts & recreation and health care & social assistance (both up 2.7%yr), while mining continued to see the slowest wage growth, circa 1.2%yr. All of these outcomes are soft versus history, and would have come as a significant surprise to the RBA.”

“The enduring weakness in wages remains a stark contrast to employment growth as per the labour force survey. October only saw a net gain of 3.7k jobs. However, that came as a result of a 24.3k increase in full-time employment, and saw the annual pace of total employment growth sustained at 3.0%. At nearly twice the pace of population growth, employment growth is unquestionably strong.”

“There are two factors behind the great divide between employment growth and wages: (1) the jobs that are being created are typically lower-paid positions, an outright negative for growth in average incomes across the population; and (2) while the unemployment rate is less than half a percentage point from its full employment level, the rate of underemployment has continued to trend higher over the past three years and is presently near its historic high. Broadly, the supply of potential workers is plentiful; hence, there is no meaningful pressure on wages growth.”