Australian companies and consumers are divided as never before over their judgment of the nation’s economy.
Business confidence is powering along and conditions – a measure of hiring, sales and profits – hit a post-2008 crisis high. But consumer sentiment remains in the doldrums. Pessimists outnumbered optimists for an eighth-straight month, data showed last week, as heavily indebted households struggle with stagnant wages to make ends meet.
Rarely mentioned among explanations for the above is the Aussie dollar: five years ago the strong currency was a bonanza for consumers who could buy cheap goods from overseas; a 25 percent depreciation since then has been a boon for exporters but few others. In addition, while a spike in commodity prices in the past 12 months sent corporate profits surging, almost none of that money has made its way to workers.
“The disparity between business confidence and consumer is really just reflecting the difference in where the income is flowing,” said Gareth Aird, a senior economist at Commonwealth Bank of Australia, noting low interest rates also help. “But when you look at stuff to do with the consumer – wages, the level of underemployment and so forth – it’s not a surprise that consumer confidence is so weak.”
The Reserve Bank of Australia predicts a gradual pickup in pay packets from their current record low pace of growth – and officials have expressed surprise that wages aren’t rising faster given their historical response to unemployment of 5.5 percent. The difference is that underemployment is hovering near a record high and the underutilization rate – the sum of unemployment and underemployment – is close to its highest since the late 1990s.
RBA Governor Philip Lowe last month urged workers to make the case for higher wages to their employers. In his view, Australia is in a similar funk to other developed nations, where employees are concerned about rising competition from cheaper labor in foreign countries and increasing automation, including from robots.
Aird warns that, if policy makers focus too much on the unemployment rate and not enough on underemployment and underutilization, they’ll end up overstating the strength of the labor market. He notes Australia’s jobless rate has been higher than the U.S., U.K. and Japan’s since mid-2014.
“It is too simplistic to assume that timidness from employees in asking forpay rises is holding wages growth back,” Aird said. “In our view, labor market slack must recede further for wages growth to lift.”
While population growth of about 1.5 percent has helped underpin the economy’s expansion for 26 years, that’s only at the headline level. Drilling down, the economy expanded just 0.2 percent on a per capita basis in the year through the first quarter.
Australia has been grinding through an economic transition to services and manufacturing and away from mining over the past five years, and the RBA slashed interest rates to a record 1.5 percent to cushion the handover. While that’s sparked a boom in residential housing construction that’s helped soak up former mine workers, it’s also sent property prices in Sydney and Melbourne soaring. The result: a surge in household debt to a record 190 percent of income.
As households are squeezed by high debt and weak wage growth, they’ve supported consumption by drawing on savings, resulting in a halving of the ratio since 2013 to 4.7 percent.
Westpac Banking Corp’s consumer sentiment came in at 96.6 in July, with a reading below 100 showing pessimists outweigh optimists.
“The index is not sending encouraging signals about the outlook for consumer spending,” Chief Economist Bill Evans said in a statement. Michael Heath, Bloomberg