GDP released last week showed overall economic growth at 1.1% for the quarter, widely celebrated by the government and the media. But the headline buried an underlying trend for Australian households that has been building for the past four years and is now at its worst level since records began in 1983: household income growth
“Four of Australia’s big five states experienced negative wage growth in the December 2016 quarter.”
That’s the conclusion of the “Compensation of Employees” survey done with the GDP release. When we analyse this data we are looking for signals about the health of the economy, so look at private sector wages only, as government wages don’t tend to be set by market forces. So the figures show the total amount paid by the private sector to employees, and this total fell by 0.5% in the December quarter, creating the longest period of wage weakness on record. See Figure 1.
Compensation of Employees: Australia, qtrly change 1983-2016
Source: ABS, FIIG Securities
Figure 1
State by state data highlights the problem with GDP data
Australia’s GDP grew by 1.1% in the December quarter, pushed up primarily by higher commodity prices, reflected in the GDP “net exports” component.
Just because prices were higher for the quarter, does not mean the economy produced more. If the higher commodity prices were reflected in higher incomes, that would likely result in higher consumer spending and therefore higher GDP. But as shown in Figure 2, it is the three largest mining states, WA, SA and Queensland that performed worst in terms of income growth.
State by state:
- Not surprising to anyone living in WA, the current drop in compensation is the largest ever for any state, dropping 5%pa for the past two years
- SA has also turned sharply negative, surpassing their fall in incomes in the 1992 recession
- Queensland is negative for the first time, passing the previous low of 2.4%pa growth
- NSW, while still strongly positive for the past two years, turned negative in the December quarter
- Victoria has been surprisingly strong for three years now, nearly rising at its 30 year averages, although even Victoria experienced just 0.3% growth in the December quarter compared to its long-term 1.5% per quarter growth rate
Source: ABS, FIIG Securities
Figure 2
Conclusion – One more cash rate cut to come
Australian rates are driven by the domestic economy, not net exports. While household spending showed positive signs in the December quarter, it came from household savings, which is not sustainable. The general decline in wages growth is a great concern for the domestic economy.
If the US and other global trading partners increase rates faster than expected, the RBA might be able to get away with not lowering rates as higher interest rates offshore will attract dollars out of Australia, pushing the AUD down, increasing our competitiveness and thereby pushing up demand for job producing products and services like education and tourism.
If not, the RBA will need to lower rates to boost the economy, although the persistence of the housing boom will give them great concern. On balance we still believe that the RBA has one cut left in 2017, and either way, whether because of rising offshore interest rates or the RBA lowering rates (or both), the AUD is overvalued at these levels.