Fastest Victorian annual wages growth in 5½ years; Consumer views on home purchases hits 5½-year high

Wage Price Index; Consumer confidence

• Wages: The wage price index rose by 0.6 per cent in the June quarter (consensus: +0.5 per cent). Annual wages growth was steady at 2.3 per cent – near 4½ year highs. Public sector wages were up by 0.8 per cent in the June quarter – the biggest increase in 5 years – to be up 2.6 per cent on the year. Private sector wages were up 2.3 per cent on the year.
• Bonuses paid: Including bonuses (total hourly rates of pay), wages rose by 0.4 per cent in the June quarter to be up by 2.5 per cent on a year ago.
• Victoria leads: Victorian wages rose by 2.9 per cent over the year to June – equalling the strongest annual growth in 5½ years. Annual public sector wages growth of 3.7 per cent is the strongest in 3½ years.
• Consumer confidence: The Westpac/Melbourne Institute survey of consumer sentiment index rose by 3.6 per cent – the biggest lift in six months – to 100.0 points in August. The sentiment index is near its long-term average of 101.5 points. A reading above 100 points denotes optimism.
• Consumer views on home purchases: The ‘time to buy a dwelling’ index rose by 3.0 per cent to 126.9 points in August – the highest level in 5½ years.

The data on wages highlights the costs faced by businesses and gives insights into future interest rate decisions. The consumer confidence figures have implications for retailers, and other consumer-focussed businesses.

What does it all mean?

• In the latest CommSec State of the States report, Victoria is the best performing economy in Australia after assessing eight key economic indicators. In the year to June, 126,500 jobs were added in the state with annual job growth of 3.8 per cent. The unemployment rate is at 4.7 per cent in trend terms. With the labour market tightening, annual wages growth has lifted to 2.9 per cent in June – the equal strongest growth rate since September 2013. And the 4 per cent pay boost for Victorian public sector nurses and midwives on April 1 has boosted overall annual public sector wages growth to 3.3 per cent – the fastest pace in 3½ years.
• Tasmanian private sector wages grew by 3.2 per cent over the year to June, the strongest growth rate since June 2013, despite the unemployment rate lifting to 6.7 per cent in trend terms in June.
• As always, it’s important to relate wages to prices. Wage growth may be slower than in the past, but so is price inflation. Wages are still well ahead of consumer prices in most states and territories.
• Consumers are feeling OK. Sentiment lifted by the most in six months in August. The receipt of tax offsets and lower mortgage rates have boosted consumer attitudes towards shelling-out for a major household item. The ‘time to buy a major household item’ sub-index lifted to a 12-month high.
• Broader property market sentiment has improved following the Federal Election and interest rate cuts by the Reserve Bank. The bank regulator APRA has also stepped-up with potential mortgage lending reforms.
• With mortgage rates now the lowest since the 1950s, home prices stabilising in Sydney, Melbourne and Brisbane and housing affordability improving over the past two years, it seems that home buyers are considering ‘dipping their toes’ back into the market. Sentiment towards buying a dwelling is the highest in 5½ years.

What do the figures show?

Wage Price Index

• The wage price index rose by 0.6 per cent in the June quarter following a 0.5 per cent increase in the March quarter. Annual wage growth was steady at 2.3 per cent.
• Private sector wages rose by 0.5 per cent in the June quarter with public sector wages up 0.8 per cent – the fastest growth in 5 years. Private sector wages rose by 2.3 per cent in the year to June. Public sector wages rose by 2.6 per cent over the year to June.
• Including bonuses (total hourly rates of pay), wages rose by 0.4 per cent in the June quarter to be up by 2.5 per cent on a year ago. Private sector wages rose 0.4 per cent in the quarter and 2.4 per cent on the year. Public sector wages rose 0.6 per cent in the quarter and 2.5 per cent on the year.
• Industries with fastest annual wage growth: Health care & social assistance (up by 3.3 per cent); Electricity, gas, water and waste services (up 2.8 per cent); Arts & recreational services (up by 2.8 per cent) and Public Administration & Safety (up 2.5 per cent).
• Industries with slowest annual wage growth: Wholesale trade (up 1.7 per cent); Information media & telecommunications (up by 1.8 per cent); Construction (up by 1.9 per cent) and Retail trade (up by 1.9 per cent).
• Annual wage growth across States & Territories: Victoria (up by 2.9 per cent); Tasmania (up by 2.4 per cent); NSW and Queensland (both up 2.3 per cent); ACT and South Australia (both up by 2.2 per cent); Northern Territory (up by 1.9 per cent) and Western Australia (up by 1.6 per cent).
• In terms of real wage growth, all states and territories except Western Australia have annual wage growth exceeding inflation. Doing best is Victoria: wages are up 2.9 per cent versus 1.3 per cent inflation. But real wage growth is flat in the Western Australia.

Consumer confidence

•  The Westpac/Melbourne Institute survey of consumer sentiment index rose by 3.6 per cent to 100.0 points in August. The sentiment index is near its long-term average of 101.5. The survey of 1,200 people was conducted from August 5-10.
• The current conditions index rose by 2.0 per cent and the expectations index lifted by 4.7 per cent.
• All five components of the index rose in August:
  • The estimate of family finances compared with a year ago rose by 0.9 per cent to 86.5 points;
  • The estimate of family finances over the next year rose by 0.7 per cent to 99.1 points;
  • Economic conditions over the next 12 months rose by 9.6 per cent to 95.5 points;
  • Economic conditions over the next 5 years rose by 4.5 per cent to 95.7 points;
  • The measure on whether it was a good time to buy a major household item rose by 2.8 per cent to 123.0 points.
• Housing outlook: A good time to buy a dwelling? The index rose by 3.0 per cent to 126.9 points to be up 16.7 per cent on the year. House price expectations rose by 5.1 per cent to 125.4 points to be up 11.2 per cent on a year ago.
• Unemployment expectations: Unemployment expectations fell by 0.8 per cent to 133.3 points (assumes a stronger job market).

What is the importance of the economic data?

• The Wage Price Index has been compiled since September quarter 1997 and measures quarterly changes in wage and salary costs for employees. The index is based on a representative sample of employees, and includes measures of non-wage costs including superannuation, payroll tax, public holiday and workers compensation. The Wage Price Index is useful in measuring wage pressures in the economy. While strong growth in wages would boost domestic spending, it could also serve to lift employer costs and prices and add to economy-wide inflationary pressures. The wage price index is a measure of hourly pay rates (excluding bonuses).
• Westpac and the Melbourne Institute release the Index of Consumer Sentiment each month. According to Melbourne Institute: “The survey of consumer sentiment was first undertaken in 1973 and was conducted on a quarterly basis until 1976, a six-weekly basis from 1976 to 1986, and has been conducted monthly ever since.” Confident consumers may be more inclined to spend, especially on major items.

What are the implications for interest rates and investors?

• Annual Aussie wage growth remains around 4½-year highs, but the pace of pay rises has been steady at a tepid 2.3 per cent for four successive quarters. Weak activity and demand in the retail trade, wholesale trade and construction sectors – growth all below 2 per cent – are a drag on overall wages growth.
• Wages growth is much stronger in the US, UK and New Zealand – all around decade highs – because jobless rates are below 4 per cent in these economies. Given the loss of momentum in hiring intentions, additional fiscal and monetary stimulus is required to lift workers’ wages and erode spare capacity ‘Down Under’. Private sector balance sheets are already stretched given the slowdown in global and domestic economic growth.
• Strong jobs growth, however, in the public service due to increased spending on the National Disability Insurance Scheme (NDIS) and pay rises for Victorian nurses and midwives drove overall wages growth in the June quarter. The Victorian government has also increased funding for paramedics and the police. And strong public-transport related infrastructure spending is also driving pay claims for train, tram and bus drivers.
• The next major focus is the July monthly job data tomorrow. The unemployment rate is expected to remain steady at 5.2 per cent for a fourth consecutive month with 20,000 jobs added.
• CommSec expects the Reserve Bank to cut interest rates for a third time this year in the coming months.