Each quarter of low wages is a nail in the coffin of growth

Quarter by quarter, Australia is locking in a low-growth future in which households are too worried about their incomes to spend and policymakers rely on the most dysfunctional part of the Australian economy — property prices — to drive domestic economic growth.

Yesterday’s Wage Price Index (WPI) data for the December 2019 quarter was almost exactly as expected. Another 0.5% for the quarter, another 2.2% for the year. The halcyon days of mid-2019, when growth reached a soaring 2.3% and the Reserve Bank (RBA) governor pronounced a “gentle turning point” look distant indeed.

One AFR journalist noted the “positive surprise … that for the first time since 2012, private sector wages grew at a faster rate than the public sector.”

Positive if you hate public servants, maybe — it wasn’t because private sector wages growth improved, but because public sector wages growth recorded its worst result since 2000, thanks especially to the Coalition’s stringent 2% salary caps.

Otherwise, it was the usual suspects, health and infrastructure, that recorded the best results, 3.1% and 2.9% annual growth, respectively.

Key sectors manufacturing, construction and retail all recorded around 1.8% growth — which given CPI in the quarter was 1.8%, means no real wages growth at all before tax (as Michael Pascoe points out, we overlook the fact that when wage rises are so small, tax ends up pushing real wages growth negative).

Even education, normally a strong sector, fell below 2% annual growth.

In December in its budget update, the government was still insisting wages growth would hit 2.5% in 2019-20 (revised down, of course, from its previous forecast). To hit that, WPI will have to surge to 2.8% in the current and next quarters.

Good luck with that.

The Reserve Bank is far more realistic and expects growth to stay at 2.2% for the remainder of this financial year and then lift to 2.3% by December — despite its Pollyannaish belief that the economy will cruise through the impacts of the bushfires and coronavirus.

This steady drip of low wages growth isn’t just crimping economic growth now, it’s reshaping Australians’ financial behaviour.

In the minutes of its February board meeting, you can see the bank wrestling with what persistent wage stagnation is doing to consumers.

“Members observed that the prolonged period of slow growth in income was expected to continue to weigh on consumption over coming quarters. Furthermore, recent data had suggested that households were directing more income to saving and reducing their debt.”

They returned to the issue when discussing the impact of interest rate cuts on financial conditions.

“Households’ total mortgage payments increased in the December quarter, with a rise in principal and excess payments more than offsetting the decline in interest payments. Members discussed whether this increase reflected a change in behaviour by households and the potential for it to persist. They noted that some households were likely to be repaying their debts faster in response to low growth of their incomes and the earlier fall in housing prices.”

That is, wage stagnation is worrying people so much that they’re doing everything they can to get their debt levels down, using interest cuts, tax cuts, and anything else they can throw at their mortgages.

How long will that persist? A starting assumption would be it will persist while wage stagnation persists, which the Bank forecasts will be well into the 2020s.

But the RBA is hoping that the property price surge sparked by interest rate cuts will fix it, with household consumption increasing “gradually, sustained by moderate growth in household disposable income and the recovery in the housing market … Higher housing prices and the associated increase in housing turnover were expected to support consumption and dwelling investment.”

The RBA’s goal used to be to get unemployment down so as to to push up wages. Has it chucked in the towel on that? Has it decided just to hope the wealth effect from another surge in property prices — locking ever more young and low-income people out of the property market — gets households spending again, not decent pay rises?

Given the impact of the bushfires and coronavirus, the economy could slow substantially or even shrink this quarter. If it does, however, the real cause is years of wage stagnation and what it has done the psyches, and battered finances, of Australian households.