Growth in employment and wages are increasingly likely to hold the key to how well the Australian economy can grow over the next year. Employment and wages combined are the major determinant of growth in household disposable income. In turn, growth in household disposable income is likely to determine how freely or otherwise households spend and that in turn will influence the willingness of Australian businesses to invest. This week, wages growth for Q2 2016 and employment growth for July will be released and if they come in around market consensus forecasts the omens for household spending are poor.
The consensus market forecast according to the regular weekly newswire surveys is that wages rose in Q2 by 0.5% q-o-q, or 2.0% y-o-y, compared with 0.4% q-o-q, 2.1% y-o-y in Q1 and that employment rose by 10,000 after a 7,900 increase in June. If these numbers come in close to market expectations they will imply continuing softness in labour market conditions and continuing low growth in household disposable income presenting a stiff headwind to growth in household spending.
Taking wages growth first, quarterly growth has been mired for more than two years with average quarterly moves slightly above 0.6% q-o-q through 2014, 0.55% q-o-q through 2015 and starting 2016 at only 0.4% q-o-q. This low and fading growth in quarterly wages growth has resulted in annual wages growth slipping from 2.6% y-o-y in Q1 2014 to 2.3% y-o-y in Q1 2015 and only 2.1% y-o-y in Q1 2016. Annual wages growth has kept plumbing new record lows for the 20-year old wages survey and looks set to make yet another record low on market consensus forecast with the Q2 report out this week.
With wages growth so low and showing no signs of picking up any time soon the only way to lift growth in total wages income in the economy to a more respectable 3.0% y-o-y or more is through strong employment growth contributing to growth in total paid hours worked in the economy. During the second half of 2015 employment growth came to the party strongly rising by 181,500 and contributing to a 0.8% rise in total paid hours worked in the economy between June and December 2015. Employment growth and hours worked have softened, however, in the first half of 2016. Employment rose by 43,500, less than a quarter of the total employment growth in the second half of 2015, and with a much lesser contribution from full-time employment too. The softer employment growth by number and contribution from full-time led to paid hours worked actually falling by 0.2% in the first half of 2016.
Softer employment growth in the first half of 2016 and a change from reasonable growth in total hours worked in the second half of 2015 to a small fall in the first half of 2016 imply significantly softer growth in household disposable income, really struggling to come near 3.0% y-o-y in nominal terms and hard pressed to sustain real growth in household spending that has been running close to 3.0% y-o-y and has been the solid, consistent mainstay of GDP growth so far.
This is where the numbers this week are so important. Is there any surprising lift in wages growth in Q2 for some unknown reason? If there is not, as all analysts are forecasting, wages growth on its own is far too soft to sustain reasonable growth in household spending. Even if wages growth comes in around the dour number expected is there a hint that total wages growth could lift in Q3 because July employment growth is much stronger than expected?
If the July employment reading is to make any dent on the soft outlook for total wages growth it will need to show a rise of at least 25,000 and that mostly full-time jobs in turn contributing to a noticeable lift in total paid hours worked. The quirkiness of employment reports month-to-month mean such a result cannot be entirely ruled out, but it does seem very unlikely.
In the absence of meaningful upside surprises with wages and/or employment this week, the outlook for household income growth and household spending are looking very bleak. This bleak outlook as much as signs that inflation is staying persistently low imply to us that more RBA cash rate cuts are coming and that the era of very low interest rates still has some way to go.