In an essentially consumption driven economy, economic growth measures like Gross Domestic Product (GDP) record the rate of growth in consumption, among other factors. Soft consumption data – we have seen that reported through pretty lousy retail sales – is directly linked into slow wages growth, that in many cases has failed to keep pace with inflation rates – and that means households have less money to spend. In turn, lower expenditure holds economic growth back.
The Reserve Bank of Australia (RBA) has been clear for more than a year now. Wages have been falling and need to grow. The chart below shows how wages have declined as a proportion of total factor income over the last twenty-five years, and conversely, how profits have grown.
To go straight to the dashboard and take a closer look at the data, click here.
Another way to look at this is to examine annual compensation growth on a per employee basis. This is shown below, both in total and on average. That data does show a softening of growth, but growth, nonetheless.
To go straight to the dashboard and take a closer look at the data, click here.
There is some contrary data and opinion about the impact of softer wages growth over the last decade or more. Writing an Economics Society of Australia report, former senior bureaucrat Declan Trott provided a depreciation and other element adjustment of the labour share of total factor income. Trott’s findings were essentially that mineral exports and related activity accounted for most of the fluctuations in the labour share. Trott commented that:
“Our findings appear compatible with a tendency for the labour share to remain fairly stable over the long run, but with large fluctuations upwards during the oil, wage and other shocks of the 1970s and downwards in the mining boom of the 2000s.”
There are those who will suggest that the economy of the 1970s bears only limited resemblance to that of 2019, and thus, reliance on that period is likely to be unrealistic. However, more recently, Trott concludes that:
“…recent fluctuations in the labour share appear very closely tied to the terms of trade and the fortunes of the mining industry.”
That could be so, but even if that’ is the case, it is cold comfort right now.
Perhaps inevitably, as wages have remained low and failed to keep pace with price increases, households have also increased their debt levels. Housing is the main part of that, but not all of it.
Though not unprecedented in Australian history, usually the level of household debt has risen for a period of time due to interest rate rises, which have then come back in line relatively quickly as wages increase. But this time it is different. Interest rates are low, but household indebtedness has increased. There have been several drivers, not least of which has been the national fixation on bigger, better and ultimately more expensive houses, and things to put inside them for the betterment of our lives.
A near three-decade long debt-fuelled orgy of consumption would usually have been supported by solid wages growth, but this time around that simply has not happened.
We can see below that since 1988, total household debt has grown from 65.3% of disposable income (the blue-line on the left hand side) to a near world-leading 188.6% by late 2018. We can also see that interest payments for housing and personal items as a ratio of disposable income (the green line charted on the right-hand side) has lifted from 7.9% in 1988 to 9.1% in late 2018.
Right now, interest payments are not a huge drain on domestic consumption capacity. But what if interest rates were to double to a still-low 3.0% (the RBA cash rate) and as a result, mortgage lending rates slipped up to an average of say 11% (around double their current level)?
To go straight to the dashboard and take a closer look at the data, click here.
Now, that takes us back to consumption. With wages not growing, debt ratios increasing and low interest rates, its easy to see why households are not spending more right now. In fact, we can see it clearly in Greg Jericho’s chart below. In short, real household disposable income is declining on a per capita basis.
It is becoming ever more easy to imagine a circumstance in which low wages growth and say unemployment rises, or price inflation occurs (energy, health and other staple costs are already under constant upwards pressure for instance), consumer spending will slump as meeting loan repayments dominates household spending.
Readers can take their own view of the likelihood of one more economic shock pushing the economy to tipping point, but if it comes about, Australia’s capacity to respond could be significantly reduced.
That said, and as history and the next item shows, there are bright spots that provide something of a way forward to stimulate economic growth into the future.
This article was written by Jim Houghton for FWPA’s latest StatisticsCount.