As household reserves vanish, we need wages to keep growth going

After the Reserve Bank began lifting interest rates this year, in spite of its repeated statements that rates wouldn’t rise until 2024, governor Philip Lowe often observed that it would be OK because Australian households had “buffers” that they had built up during the pandemic, from money they’d been unable to spend in lockdown or from lower mortgage costs.

Lowe hasn’t referred to any buffers for a while now, and yesterday’s September quarter national accounts suggest why. The buffers have been used up.

Strong household spending kept the economy afloat in September, contributing 0.6 percentage points to GDP growth — not on household goods (although there was a lift in spending on delayed delivery of cars) but on coffee, cafes, eateries, burgers and booze, and holidays.

That household spending and higher interest costs for housing (and higher rents) saw the household-savings-to-income ratio fall for the fourth consecutive quarter, from 8.3% to 6.9%. That’s almost the same as the pre-pandemic 6.8% in the December 2019 quarter and confirms the great build-up in bank deposits and cash in hand by consumers — which helped power the online shopping booms of 2020 and 2021 — is over.

In another sign of normalisation from the pandemic, spending on services rose 1.7% but dropped 0.4% on goods (excluding motor vehicles), suggesting a rebalancing of consumer spending patterns away from the goods-oriented approach that marked the lockdowns.

The growth result of 0.6% was markedly slower than the 0.9% of the June quarter as increased imports offset a rise in exports, billions of dollars more in dividends and payments flowed from Australian companies (especially energy companies) to offshore shareholders and financiers, overseas travel by Australians grew faster than inbound tourism and migration, and the wet weather clipped exports of coal but helped boost rural exports.

Weaker commodity prices including iron ore resulted in a 6.6% decline in Australia’s terms of trade, its largest fall since June 2009 as we were emerging from the financial crisis — but off a very high base.

Compensation of employees increased 3.2% over the quarter, and 10% over the year, but before anyone at Martin Place yells “wage-price spiral”, that’s an aggregate measure reflecting the fact that more than 690,000 extra people had jobs in the September quarter than a year earlier, an increase in the size of the labour force of 5.4%.

The only thing noteworthy about wages data in the national accounts is that the wages share of income rose again after several successive falls, to 50.2%. That sounds like great news — except it’s still far below even pre-pandemic levels, which were characterised by extended wage stagnation. The profit share of income, at 31.3%, was the second highest on record after the June quarter.

Right-wing economists and business cheerleaders have been anxious to dismiss this telltale sign of a broken industrial relations system for some time. At The Australian Financial Review, Ronald “Google it, mate” Mizen tried to wave it away today by arguing that extraordinary mining profits were skewing the data and inflating the overall profit share, making it seem like businesses were creaming it while workers got nothing. Take out mining profits, Mizen says, and it’s a very different story — “non-mining profits slumped.”

It echoes the argument of the Business Council (BCA) earlier this year, that if you take out the mining and banking sectors, corporate profits have fallen.

As the Australia Institute pointed out in August, while mining profits skew overall profits, there’s no evidence at all that non-mining (or non-mining and banking) profits have fallen, let alone “slumped”. And if you need to cherry-pick the data to remove industries that skew profits, why not also remove industries where wage outcomes skews overall wages, like government-dominated health, which saw the consistently strongest wages growth over the last decade?

Mizen and the BCA removing mining from their calculations because it’s inconvenient might make sense if huge mining profits also saw big wage rises in that sector. In fact, mining had the second-lowest wages growth in the September quarter and has been one of the worst performers when it comes to wages growth over the last decade.

That is, mining is the poster child of exactly what the Fin and the BCA want to wish away — corporations making huge profits while screwing down wages growth as much as possible. No wonder they want to exclude it.

Not a great sign in an economy relying on household spending to keep growth going.