Wages separate businesses from consumers

Not happy Jan! This is the collective cry of Australian consumers according to the latest Westpac-Melbourne Institute consumer sentiment survey.

Yet only a day before, the NAB business survey showed that business conditions in July were at their best levels since before the GFC (January 2008). But consumer moods are also tracking 2008 records...on the downside as observed by Westpac chief economist Bill Evans: "We have not seen such a succession of weak reads since 2008."

The Westpac-MI consumer sentiment index declined to a reading of 95.5 in August from 96.6 in July. This is the ninth straight month where pessimists outnumbered optimists (below 100) and worse, the sixth consecutive month of deteriorating confidence.

In a nutshell, Evans explained that "the survey detail suggests increased pressures on family finances; concerns around interest rates; and housing affordability in NSW and Victoria are more than outweighing increased confidence around jobs."

"Much of the weakness is likely to reflect a mix of weak growth in wages; increases in key costs such as electricity and emerging concerns about rising interest rates..."

Yes Virginia, we're back to wages. The same one the RBA notes as the "largest component of business costs" and which helps explain rising company profitability and therefore, business conditions and confidence. Growth in total wages remained at a record low 1.9% in the March quarter. But this isn't the problem for wages are still growing. The problem is real, growth in real wages (nominal wages adjusted for inflation) that is - it's now negative. In simple terms, wages are growing by less than the increase in consumer prices.

The RBA's 'Statement on Monetary Policy August 2017' report already touched on the dangers of this for the Australian economy: "Ongoing expectations for low real wage growth remain a key downside risk for household spending. The recent sharp increase in the relative price of utilities poses a further downside risk to the non-energy part of household consumption to the extent that households find it hard to reduce their energy consumption..."

Not only that, "elevated debt levels are likely to amplify any risks to consumption; if indebted households become less confident about their future prospects, they could choose to pay down debt faster, in which case consumption growth could be lower than forecast."

The question going forward is whether strong business conditions and confidence encourage Australian bosses to hand down fatter pay cheques. Did I just hear a couple of chief executives saying, "not on my watch!"?  For in this shareholder-centric world why would they, when their own remunerations and bonuses are tied to their companies' share price which depend on profitability which, in turn, would be eroded by offering generous salaries to their employees. No sir!

Surely not. More than many companies have moved or established shops in low-wage, low-cost parts of the world and/or operating online to reduce overheads and their wage bill.

But this state of affairs with regards to wages cannot continue indefinitely without negative repercussions for businesses and the economy overall. The RBA already noted the downside risk from sluggish wage growth - it could solidify low wage expectations and crimp household spending.

Less household spending equals lower sales equals reduced profit equals lower share prices equal lower CEO remuneration/bonus. Not to mention, the reduced productivity due to lowered motivation of employees stuck with low pay and rising prices of basic necessities - utilities, health, shelter, cigarettes (ok, maybe not this one). Certainly, money is not a great motivator but it pays for food on the table and warmth on wintry days.

What goes around will come around.

Read more: WestpacBill EvansMonetary Policy AugustMr. EvansNABNSWVictoriaWestpac-Melbourne Institute
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