At face value it doesn’t seem like a surprising outcome. Wages rose by 0.9% in the June quarter to be up 3.8% over the year. In fact, this type of wage outcome has been the norm over the past decade – wages have risen on average by 3.8% a year since 2002.
But for most of this period productivity was growing at a faster pace. In fact from the 1980s up until 2006 the trend pace of productivity growth has been around 1.5-2.0% a year. And that has been important in keeping inflation in check. If businesses are giving pay increases of around 4% a year, they have to rely on productivity growth of 1.5% to prevent them from having to lift prices by more than 2.5% a year.
It has been perceived that the Reserve Bank has a “line in the sand” on wage growth of around 4.5%. The maths is this: if wages grow 4.5% a year and productivity grows by 1.5% then businesses may need to lift prices by 3.0% a year. Now, the Reserve Bank wants to keep inflation between 2-3% a year, so it is clear that a 4.5% wage outcome is a maximum tolerance level for the Reserve Bank – unless of course something else is also happening at the time. For instance a strong dollar may be keeping other costs down, and indeed that is happening at present.
But labour productivity is currently going backwards at a 1.5% annual rate. And looking back over the past five years productivity has been barely rising – up 0.5% per year. So using the normal equation: 3% inflation plus 0.5% productivity means that wages should be growing at 3.5%. And if wages are growing by more than this, then something else needs to happen to prevent the company from pushing up prices by more than 3%. The current earnings season shows that companies are fixated on keeping costs down and boosting productivity – and one way of doing that is to trim employee numbers.
Clearly in the current environment other things are indeed happening. The higher Australian dollar is reducing prices for a large range of business purchases. This covers everything from computers to chairs; paper to specialised machinery. So the high Australian dollar may be buying the Reserve Bank some time on rates.
At the same time consumer conservatism is making businesses wary about lifting prices. Of course if consumers were spending more freely, then this would be less of a problem – a bit extra could be added to price increases. But every business is looking over the shoulder at the opposition. And the high Aussie dollar again comes in here, with foreign businesses added to the list of competitors – but through the online channel – clicks, not bricks.
So while there are extenuating factors at play at present, the new equation on productivity will make the Reserve Bank more reticent about cutting interest rates. Unless productivity lifts, the RBA will need to be sure that if consumers start spending freely again that businesses won’t quickly turn around and lift prices.
If it wasn’t for the Reserve Bank, there wouldn’t be a lot of work for economists in the coming week. Economic data is thin on the ground – the main interest will be in the US Federal Reserve annual meeting from Thursday.
On Monday the Bureau of Statistics (ABS) releases a report that examines aspects of the National Accounts – the quarterly report card on the economy that contains the quarterly economic growth estimates. But this release is basically for economic aficionados.
On Tuesday the Reserve Bank Deputy Governor delivers a speech to The Economist magazine’s Bellwether Series Australia 2011. The ABS releases estimates on government finances for the 2011-12 year as well as a survey detailing how we are using our cars and other motor vehicles – both the frequency and purpose.
On Wednesday the ABS releases data on construction work that was completed in the June quarter. At face value this is a backward-looking document, which in large part it is. But the estimates on residential work are an input to the broader calculation of economic growth, so they have some importance. And there are also estimates of “work yet to be done” and “work in the pipeline” which are more forward-looking – giving a sense of order books for builders and engineers.
And on Friday the Reserve Bank Governor testifies on monetary policy settings to the House of Representatives Economics Committee in Melbourne. The Governor generally appears twice a year before the Committee so this may be the last time in 2011 to hear Glenn Stevens express in detail what his “hot button” issues are.
In the US, again “top shelf” economic data is thin on the ground. The week kicks off with the Chicago Fed index on Monday while data on new home sales and the Richmond Fed index are issued Tuesday together with the weekly estimates of chain store sales. Economists are tipping a modest lift in home sales from a 312,000 annual rate in June to 315,000 in July. Home sales are bumping along the bottom, but the good news is that inventories are drying up – down from 7.8 months to 6.3 months in the past five months. The number of homes available for sale is at the lowest level since 1963.
On Wednesday, data on durable goods orders for July is released. And while it doesn’t seem to make sense, orders have followed a zig-zag pattern for around a year – up one month, down the next. Orders fell 1.9% in June and, surprise, surprise, economists tip a 2% increase in July. Overall it gives a sense that business investment is going sideways like a lot of other key indicators.
Also on Wednesday the Federal Housing Finance Agency releases its estimates on home prices for June. On Thursday the data on weekly claims for unemployment insurance and Kansas City Fed survey are released.
On Thursday the annual meeting of Federal Reserve policymakers will get underway in Jackson Hole. The $64 question is what will Ben Bernanke say or do to stimulate the US economy.
And on Friday the second estimate for US economic growth in the June quarter will be published. The “flash” estimate showed annualised growth of 1.3% and economists aren’t expecting much change in the adjusted estimates. The Reuters/University of Michigan consumer sentiment index for August is also issued. This is the second take on sentiment for the month – the first estimate showed sentiment at a 31-year low.
The biggest week in the current profit-reporting season lies ahead. No surprises so far – miners have been positive, other global companies have been hit by the high dollar and domestic-focussed companies have had soft results.
On Monday, earnings are expected from Amcor, Primary Health Care and Tassal Group. On Tuesday, Consolidated Media, Hills Holdings, Mirvac, SEEK, Sonic Healthcare and Whitehaven Coal are all due to report. On Wednesday the profit results are expected to include those from Asciano, APA Group, BHP Billiton, Charter Hall Office, Customers Ltd, Clearview Wealth, Downer EDI, Pacific Brands, Qantas, Ridley Corp, Suncorp Metway, SevenWest Media, Southern Cross Media and Wotif.com. Amongst those reporting on Thursday are AGL Energy, IAG, QBE, Toll Holdings, Virgin Blue and Woolworths. And on Friday, Automotive Holdings, Fairfax Media, GPT Group, Lend Lease and Spark Infrastructure are expected to report earnings.
The global sharemarket gyrations over the past fortnight have caused us to revise our forecasts for the Australian market. We now expect the All Ordinaries to end 2011 around 4,650 points (ASX 200 4,600), lifting to 4,850 by June 2012 (ASX 200 4,825) and both the All Ordinaries and ASX 200 are expected to end 2012 around 5,000 points. The assumption of a stronger Australian dollar will restrain upside for our sharemarket.
Our currency strategists have revised their views on the Australian dollar over the coming 15 months. The Aussie dollar is now expected to stay stronger for longer following the Federal Reserve commitment to keep rates effectively at zero for the next two years. The Aussie is tipped at US109 cents at end year, US110c by June 2012 and US108c in December 2012. Over the next year the Aussie is seen around 73-74 euro cents, 84-85 Japanese yen and 64-65 British pence.
Craig James is chief economist at CommSec
James was the editor and publisher of SmartCompany and LeadingCompany for five years. He is now the Australian Financial Review‘s companies & markets editor, and a former BRW editor.
