Chief economist update: RBA sees wages growth recovering but it's not guaranteed

The latest NAB business survey indicates that Australian business conditions and confidence started the year 2018 on a stronger footing and before the wailing on Wall Street happened in early February, providing succour to the domestic economy should Wall Street's weeping persists.

The survey, taken from 24 January to 31 January, show business confidence increased from +10 in December 2017 to +12 in January. This is the highest reading since April 2017 and is double its long-term average of +6.

Similarly, business conditions improved by six points to a reading of +19 in January. This is the second highest reading on record and nearly four times its long-term average of +5.

According to NAB: "Strong trend business conditions provide further confirmation of robust business activity in Australia. Strength was broad-based across industries outside of retail, although there has been some slippage in household services. Business confidence again improved, although this pre-dates recent market turbulence. Signs remain positive for investment and continued solid jobs growth."

All good...except for that reference about the broad-based strength across industries "outside of retail" which, according to NAB chief economist Alan Oster, "points to continued softness in consumer activity."

This isn't such a beautiful piece of prognosis for consumer spending account for around 60% of the Australian economy.

The NAB report tried to put lipstick by pointing out that its "wage growth proxy" - which adjusts the labour cost measure for employment changes - points to higher wages growth (therefore underpinning increased consumer spending) than reported in the Wage Price Index (WPI).

However, in the same breath, NAB's best scenario is that this only indicates "an extended period of broadly stable, modest, wages growth".

This is one of the three questions Luci Ellis - RBA Assistant Governor (Economic) - tried to answer in her address to the ABE Conference in Sydney yesterday.

"How resilient will consumption growth be if income growth stays weak?" Ellis asked.

"Our central forecast is that this weakness will end as the drag from the end of the boom dissipates and spare capacity is absorbed, such that average earnings growth recovers. There is no guarantee of this, though, and therein lies the risk," she said.

"Weak income growth can run below consumption growth for a time, but not forever. If households start to see this weakness in income growth as permanent, they are likely to change their spending patterns in response.

"Continued weak income growth presents a particular risk to the consumption outlook in the context of high household indebtedness. Households do not just wake up one day and collectively decide to pay down their debt. But if incomes turn out weaker than they expect, or some other adverse news should arise, the households carrying the most debt might feel they have to rein in their spending quite a bit."

Ben Ong is the Director of Economics and Investments at Rainmaker Group. He previously worked as a fund manager, economist, asset allocation strategist, portfolio analyst and stock market analyst. Check out his economics analysis here.

Read more: NABAustraliaWall StreetABE ConferenceAlan OsterLuci EllisRBA Assistant Governor (Economic)SydneyWage Price Index
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