For a more comprehensive round up of the week, listen to Stephen’s full report here.
Australian employment growth is unacceptably soft, notwithstanding the latest estimate for October on the revised seasonal adjustment factors that showed a rise of 24,100 in the month. A more telling number is that total employment fell by 8,600 over the three months ending October and rose by only 105,500 over the past year. The problem is that the labour force (those in employment plus those actively seeking work) is growing relatively faster than employment, up by 31,300 in October, up 3,700 in the three months to October and up 176,900 over the past year. With the supply of labour (labour force growth) outstripping the demand for labour (employment growth) the unemployment rate continues to edge upwards to 6.2% in October from 6.1% three months ago and 5.7% a year ago.
Excess supply of labour is an increasing threat to the incomes of Australian households via persistently soft wages growth. Through 2014 so far wages growth has struggled to keep pace with inflation. In both Q1 and Q2 2014, wages rose by 0.6% q-o-q against respectively 0.6% and 0.5% for the headline CPI. The CPI for Q3 was 0.5% q-o-q and Q3 wages growth due out this week is likely to be no higher than 0.6% q-o-q, 2.6% y-o-y. The problem is that the persistently soft labour market implies even softer wages growth for many quarters to come. Already the Commonwealth Government is aiming to limit annual wages growth for its employees to around 1.5% y-o-y for the next three years. It is unlikely that wage settlements in the private sector will be much better. It is likely that annual wages growth in Australia will slip below 2.0% y-o-y in 2015 and could stay low through 2016 too.
The consequences of unusually low wages growth include persistently low growth in national income (below the growth in GDP which is likely to be bolstered by exports), persistent downward pressure developing on housing rents (a consequence of both burgeoning supply of rental properties and the inability of renters to pay higher rents) and well contained inflation, even with a depreciating Australian dollar.
National income growth running slower than GDP growth means that businesses and households are likely to feel that the economy is running slowly. Getting non-mining sector firms to take up the slack from declining mining investment by lifting their physical investment spending may prove to be a frustratingly slow affair. With the housing boom in Sydney and Melbourne, the household sector has lifted its debt to income ratio back towards the highs of 2008. Low interest rates mean that housing debt is reasonably easy to service, but low wages growth means servicing existing debt load is likely to become harder, much harder if households take on further debt. Household spending in general is likely to be relatively constrained.
The RBA released its latest quarterly monetary policy statement last week and retained its view that economic growth will run sub-trend through 2015 and that inflation will be contained within 2-3% target band over the next two years. The RBA again repeated that it sees a period of stability in interest rates being appropriate for the economy. We can say with a considerable degree of certainty that the 2.50% official cash rate will prevail for the next three months and with relatively high certainty that it may persist for the next year. The more interesting part is what will be the direction of the next official interest rate move when it comes eventually. One problem is that the move appears to be at least a year away and much can change in that lengthy forecasting time frame. At this stage, we have become less confident that the next RBA interest rate move will be up. The persistently weak labour market means that it is more of a fifty/fifty proposition whether the next cash rate move is a cut rather than a hike.