Wages winners & losers

Average weekly ordinary time earnings rose by 3.5 per cent in the six months to November 2012 to be 5 per cent higher than a year ago.

• Private sector wages rose by 5.1 per cent over the year. Public sector wages rose by 4.5 per cent over the year.
• The gap between male and female earnings shows no signs of closing, having increased by 6.3 per cent over the past year. On average men are earning $13,608 more per year than women.
• The average wage stands at $72,592. The highest average wage can be found in the Mining sector ($122,767 per year) followed by Finance & Insurance services ($85,390). The lowest average wage is obtained by workers in the Accommodation and Food Services sector ($51,626), followed by Retail Trade ($52,432).
• Wages growth was weakest in Manufacturing up just 2.6 per cent over the past year, and Arts & Recreation Services (up 2.7 per cent). But in Administrative and Support Services wages rose by 10.2 per cent over the year with Mining wages up 8.0 per cent.
• Wages by states & territories: Across states & territories, we have calculated average annual wages were highest in: ACT ($85,545) from Western Australia ($82,711), Northern Territory ($73,705), NSW ($72,743); Queensland ($71,245); Victoria ($69,212), South Australia ($66,352) and Tasmania ($63,783).

What does it all mean?

• The best measure of wage growth is the wage cost index which came out yesterday. And that data showed wage growth remains subdued in the private sector. The average weekly earnings data is affected by compositional changes, such as the shift from full-time to part-time and movements across sectors. But the average weekly earnings data provides useful dollar estimates for wages.
• And there are clearly some major differences across the country when it comes to wages. Western Australia continues to dominate as the high wage state, largely driven by the mining boom and the resulting demand for workers across an array of industries. In addition, male wages continue to outpace female earnings. And the gap between high and low wage industries continues to widen.
• The gap between male and female earnings shows no signs of closing. On average men are earning $13,608 more per year than women. One key reason for the disparity is the rising demand for labour in male dominated sectors, such as mining and construction. Still there remains worrying wage disparities in other sectors as well that is clearly worthy of greater investigation.
• The latest data on wages bears out what most households would be well versed with now – the Chinese industrialisation is leading to major shifts in our economy. Wages in the fast-growing mining sector are now almost 2½ times the earnings in food sectors like cafes and restaurants as well as across the retail sector. And the resources states of Western Australia, the Northern Territory and Queensland are clearly dominating in the pay stakes.
• Interestingly despite sustained growth in real wages Aussie consumers are remaining conservative. However given that wage growth continues to outpace the rise in economy wide prices it is likely that consumer conservatism will thaw over time – particularly given lower interest rates, rising share markets and more stable house prices. Interestingly the growth in full time earnings including bonuses and overtime was also relatively well contained at 4.8 per cent.
• Wage growth will be closely watched by the Reserve Bank over the coming year. At present, wage growth across the economy does seem in balance however if activity levels pick up over the coming year, as the central bank anticipates, the labour market does have the potential to tighten. Excessive wage pressure is exactly what the Reserve Bank is attempting to curtail and the Federal Government will need to play a key role – implementing measures to improve Australia’s productivity and ensuring that skilled migration targets are constantly reviewed and revised.

What do the figures show?

• Average weekly ordinary time earnings rose by 3.5 per cent in the six months November 2012 to be 5 per cent higher than a year ago. Private sector wages rose by 5.1 per cent over the year. Public sector wages rose by 4.5 per cent over the year.
• Average weekly total earnings rose by 4.8 per cent over the year.
• Male wages rose by 3.3 per cent in the six months to November 2012 and by 5.0 per cent over the year. Female wages rose by 3.4 per cent in the six months to November and by 4.8 per cent over the year.
• Wages rose most over the year in Administrative and Support Services (up 10.2 per cent), Mining (up 8.0 per cent), Rental, Hiring and Real Estate Services (up 7.5 per cent) and Electricity, Gas, Water and Waste Services (up 6.8 per cent). ). Wages were weakest over the past year in Manufacturing (up 2.6 per cent), Arts & Recreation Services (up 2.7 per cent), and Professional, scientific and technical services (up 3.3 per cent).
• Across states & territories, we have calculated average annual wages as follows: NSW $72,743 (up 5.8 per cent over the year), Victoria $69,212 (up 3.0 per cent), Queensland $71,245 (up 5.4 per cent), South Australia $66,352 (up 4.5 per cent), Western Australia $82,711 (up 4.4 per cent), Tasmania $63,783 (up 4.3 per cent), Northern Territory $73,705 (up 2.8 per cent) and ACT $85,545 (up 5.0 per cent).
• The highest average wage can still be found in the Mining sector, at $122,767 per year. Next highest is Finance & insurance services ($85,390), Professional, scientific & technical services ($84,963) and information media & telecommunications ($84,854). The lowest average wage is obtained by workers in the accommodation and food services sector ($51,626), followed by retail trade ($52,432) and “other services” ($57,506).

What is the importance of the economic data?
The ABS publishes the Average Weekly Earnings (AWE) series on a quarterly basis. While the Wage Cost Index allows analysis of wage movements from quarter-to-quarter, the AWE series is best seen as a measure of actual dollar figures for wages. But average weekly earnings figures can be distorted by changes such as the relative growth of high-paid to low-paid jobs and the cashing out of bonuses in ordinary earnings.

What are the implications for interest rates and investors?
The fundamentals for the domestic economy remain sound and over the coming year it is clear that Australia will continue to benefit from the strength in mining activity. But the non-mining states are unlikely to feel the effects of the rise in incomes until the recovery is well and truly in full swing. No doubt as the recovery gains traction the mining states will be in the driver’s seat and continue to enjoy strong investment flows.

The low inflation environment ensures that the Reserve Bank can maintain an easing bias however the urgency for a further rate cut has been reduced in recent months given the improving economic outlook.

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• Highest and lowest wages: The average wage stands at $69,992. The highest average wage can be found in the Mining sector, at $117,905 per year. The lowest average wage is obtained by workers in the Accommodation and Food Services sector ($49,712), followed by retail trade ($50,450).
• Falling wages: Wages in the Administrative and Support Services sector fell by almost 1.1 per cent over the past year. Wages in rental, hiring & real estate also fell by 1.1 per cent over the past year. But in the Wholesale trade sector, wages soared by almost 12.7 per cent, while mining sector wages rose by 8.0 per cent over the past year.
• Wages by states & territories: Across states & territories, we have calculated average annual wages were highest in: ACT ($80,766) from Western Australia ($78,744), Northern Territory ($71,942), NSW ($69,592); Queensland ($69,186); Victoria ($68,219), South Australia ($63,471) and Tasmania ($61,532).

What does it all mean?

• The best measure of wage growth is the wage cost index which came out yesterday. And that data showed wage growth remains subdued in the private sector. The average weekly earnings data is affected by compositional changes, such as the shift from full-time to part-time and movements across sectors. But the average weekly earnings data provides useful dollar estimates for wages.
• And there are clearly some major differences across the country when it comes to wages. Western Australia continues to dominate as the high wage state, but coming up quickly is the Northern territory, with the average wage now higher than even NSW, Queensland and Victoria. Male wages continue to outpace female earnings. And the gap between high and low wage industries continues to widen.
• The gap between male and female earnings shows no signs of closing. On average men are earning $13,031 more per year than women. One key reason for the disparity is the rising demand for labour in male dominated sectors, such as mining and construction. Still there remains worrying wage disparities in other sectors as well that is clearly worthy of greater investigation.
• The latest data on wages bears out what most households would be well versed with now – the Chinese industrialisation is leading to major shifts in our economy. Wages in the fast-growing mining sector are now more than double the earnings in food sectors like cafes and restaurants as well as across the retail sector. And the resources states of Western Australia, Northern Territory and Queensland are now starting to dominate in the pay stakes.
• Interestingly despite sustained growth in real wages Aussie consumers are remaining ultra-conservative and the trend is unlikely to change anytime soon. Interestingly the growth in full time earning including bonuses and overtime was also relatively well contained at 4.4 per cent. Given the higher cost of living expenses, clearly some sectors and households would be relying on overtime and bonuses to support the household spending.
• Wage growth will be closely watched by the Reserve Bank over the coming year. At present, wage growth across the economy does seem in balance however if activity levels pick up over the next year, as the central bank anticipates, the labour market does have the potential to tighten up. Excessive wage pressure is exactly what the Reserve Bank is attempting to curtail and the Federal Government will need to play a key role – implementing measures to improve Australia’s productivity and ensuring that skilled migration targets are constantly reviewed and revised.

What do the figures show?
Average weekly earnings

• Average weekly ordinary time earnings rose by 1.1 per cent in the March quarter to be 4.4 per cent higher than a year ago. Private sector wages rose by 1.2 per cent in the quarter and by 4.6 per cent over the year. Public sector wages rose by 1.0 per cent in the quarter and by 4.0 per cent over the year.
• Average weekly total earnings rose at a faster 1.5 per cent in the quarter and by 4.4 per cent over the year.
• Male wages rose by 1.2 per cent in the quarter and by 4.3 per cent over the year. Female wages rose by 1.2 per cent in the quarter and by 5.0 per cent over the year.
• Wages rose most over the year in Wholesale trade (up 12.7 per cent), Mining (up 8.0 per cent) and Professional, scientific and technical services (up 7.5 per cent). Wages were weakest over the past year in both Administrative & support services and Rental, hiring & real estate services (down 1.1 per cent), followed by Health care & social assistance (up 1.1 per cent).
• Across states & territories, we have calculated average annual wages as follows: NSW $69,592 (up 2.0 per cent over the year), Victoria $68,219 (up 6.1 per cent), Queensland $69,186 (up 5.5 per cent), South Australia $63,471 (up 4.1 per cent), Western Australia $78,744 (up 4.0 per cent), Tasmania $61,532 (up 4.0 per cent), Northern Territory $71,942 (up 7.8 per cent) and ACT $80,766 (up 4.9 per cent).
• The highest average wage can still be found in the mining sector, at $117,905 per year. Next highest is scientific & technical services ($86,024), finance & insurance services ($82,508) and information media & telecommunications ($82,150). The lowest average wage is obtained by workers in the accommodation and food services sector ($49,712), followed by retail trade ($50,450) and “other services” ($54,906).

What is the importance of the economic data?

• The ABS publishes the Average Weekly Earnings (AWE) series on a quarterly basis. While the Wage Cost Index allows analysis of wage movements from quarter-to-quarter, the AWE series is best seen as a measure of actual dollar figures for wages. But average weekly earnings figures can be distorted by changes such as the relative growth of high-paid to low-paid jobs and the cashing out of bonuses in ordinary earnings.

What are the implications for interest rates and investors?

• Over the coming year it is clear that Australia will be riding on the back of the mining sector. But the non-mining states are unlikely to feel the effects of the rise in incomes until the recovery is well and truly in full swing. No doubt as the recovery gains traction the mining states will be in the driver’s seat and continue to enjoy strong investment flows.
• The low inflation environment ensures that the Reserve Bank can look at further rate cuts in coming months. CommSec expects the Reserve Bank to reduce the official cash rate by a quarter of a per cent at the August meeting. However the risks are that the central bank moves earlier given the uncertainty surrounding Europe.

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At the moment, there is much talk about inflation in Asia, especially in China and India. How big an issue is it when it comes to investing in the region?

China and India are high-growth countries and because of that they tend to have inflation. There are times when inflation spikes but the reasons vary. One type of inflation that people get particularly concerned about is food inflation. Food inflation is usually temporary in nature. It will usually be about a bad crop or a shortage of supply. So I’m not that worried about food-related inflation; it’s usually resolvable. Other factors could be more of a concern. The thing to note is that authorities across the region are taking steps to limit inflationary pressures.

What we focus on when looking at economies experiencing inflation is finding companies with pricing power – those that can boost their prices to maintain their profitability. We try to avoid companies that are price takers; that do not have that ability to raise their prices during inflationary times because their earnings will suffer.

What’s driving the record increase in IPOs in Asia?

The IPO boom is because many companies in Asia are looking to expand their businesses. It gives you an idea of the kind of dynamism that’s going on in Asia. The managers of these companies see growth opportunities and they’re looking to grow their capital and invest that capital to take advantage of the earnings potential that is there in Asia.

The consumption story in China is gaining adherents. How are you playing this theme?

There’s a great thematic in investing in the consumption sector within China because of the strong wage growth that’s coming through. With minimum wages growing 20% and the average wage earner seeing 15% to 16% wage growth, consumers are driving the economy more. People are moving beyond a subsistence lifestyle and for the first time are buying items such as fridges and televisions and so on.

The way I’m taking advantage of this theme is to invest in some Hong Kong-listed companies that have businesses that are growing strongly in China and that are expanding the number of stores they have there. I’m investing in some of the department stores within China as well.

Korea has several global brands. Can China replicate this achievement?

South Korea has developed some great global brands. Companies such as Samsung, Hyundai Motor and LG Electronics have been highly successful across the globe. China has the potential to develop similar brand names over the next five to 10 years. We’ve noticed how much money some Chinese companies are spending on R&D. The fact is that the Chinese companies don’t want to be the low-cost producers forever. They want to add more value to what they’re producing. As they step up that value chain, they will create brand names, locally at first, and potentially globally.

Corporate governance in Asia is a risk. How do you manage it?

Corporate governance in Asia is a challenge that we have to deal with. Our approach is to make sure that we have identified who the management are, how long they’ve been there and who the owners of the company are. We spend time with management teams to understand whether they are just focused on making money for themselves or for shareholders as well. We want to see if there are other agendas that the managements want to achieve – things that might be good for their egos but perhaps not good for the share prices of their companies. Our focus is really to identify companies that are running good businesses and delivering on the potential.

One of the great things happening within Asia is the adoption of international financial reporting standards. That means that you can compare companies within Asia and properly rate Asian companies against global peers. Most of the developed markets in Asia already comply with these reporting standards. Countries such as India and Indonesia are adopting them over the next couple of years.

How important are smaller countries in the MSCI Asia ex-Japan Index such as Indonesia, Thailand and the Philippines?

The smaller countries within Asia don’t get the same kind of profile as China and India but they are a key part of what’s going on in Asia. Indonesia, Thailand and the Philippines are all countries that have got big populations and are achieving improvements in the standard of living. Their GDPs are growing at healthy rates and wage levels are rising. These countries are urbanising. They are microcosms, to some extent, of what China’s already done. We see that to be a reason for investing in some of the companies in these countries.

How is the Fund positioned at a country level?

The Fund is overweight Hong Kong and Thailand while the key underweights are to Taiwan and Malaysia. Hong Kong is favoured at the moment because I see some of the Hong Kong-listed stocks as doing well out of China. The valuations are more attractive and there are fewer regulatory risks with some of the Hong Kong stocks than there are in Chinese stocks. Taiwan’s a mature market, one with a high GDP per capita. The growth rates are still reasonable but a lot of Taiwan’s growth is about exports, either to China or elsewhere. I see Taiwan’s competitors as being more attractive than the companies in Taiwan.

Chinese internet company Baidu is a large overweight in your portfolio. Can you tell us why you are so positive on the stock?

Baidu is effectively Google for China where there’s a good long-term growth story for internet usage. It does internet search and has over 85% market share for search in China. Google is the second-biggest player and Google has said that it is leaving China because it doesn’t want to be censored anymore.

Baidu has around 72% revenue share of search in China. We think given Baidu’s market positioning the company’s revenue share will become more reflective of its market share in search; in fact, even in excess of its market share. We expect Baidu’s market share in search revenues to become more like 85% to 90%, given the company’s dominance in the space.

Another overweight is Hyundai Motors. Can you tell us your investment thesis on this company?

There are three key reasons for owning Hyundai Motor. The first is the company has a really strong base at home in Korea that’s growing healthily. Another is that the company has fantastic exposure to the emerging markets of China, India, Brazil and Russia, where they’re achieving strong market shares. In addition, Hyundai is growing market share in the developed markets thanks to improvement in the quality of the cars and its brand. Market share has risen from around 3% to 8% in Canada, for example. Hyundai’s market share is now around 6% in the US while in Europe it’s grown from around 2% to 4% in recent years.

What can investors expect from Asia in coming years?

I’m optimistic about the outlook for Asia over the next couple of years and over the next five to 10 years as well. We see that Asia will achieve faster GDP growth than the rest of the world. I think that investing in Asian companies is a great way for investors to take advantage of this expected growth. These companies have strong balance sheets and good cash flows. They are investing in their businesses, developing great products and building brand names. We look for the companies that can take advantage of this growth and deliver earnings-per-share growth to the shareholders.

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• New business investment rose by a less than expected 1.3 per cent in the December quarter. Manufacturing dominated investment plans with investment in the sector up by 7.0 per cent as opposed to mining investment which fell by 4.8 per cent in the December quarter.
• Businesses expect to invest $128.9 billion in the 2010/11 year up 3.6 per cent on the fourth estimate from the September quarter and slightly above the usual (decade average) upgrade of 2.2 per cent made by firms at this time of the year. Investment plans are up 16.2 per cent on the equivalent estimate made a year ago.
• The first estimate for business investment in 2011/12 is $132.7 billion, up 30.3 per cent on a year ago – marking the biggest percentage lift in first estimate investment plans on record.
• Average weekly earnings rose by 1.1 per cent in the three months to November after a small 0.6 per cent lift in the previous three months. Wages rose by 3.9 per cent over the year – in line with yesterday’s wage cost index, however the result marked the slowest annual growth in four years.
• Over the year male wages rose by 3.8 per cent while female wages rose by 4.5 per cent. The average wage stands at $66,264. The highest average wage can still be found in the mining sector, at $108,009 per year.

What does it all mean?

• The latest capital investment plans certainly paints a mixed picture of the domestic economic landscape. The sluggish 1.3 per cent lift in December quarter investment suggests that businesses remain cautious, investment plans are still not being committed to, and as such activity is likely to be subdued in the near term. However the longer term outlook is much more buoyant. In fact businesses expect to invest around $132 billion over 2011/12 – a record 30 per cent upgrade on the first estimate for 2010/11.
• Overall the results confirm the CommSec view that interest rates will lift in the second half of 2011 with the cash rate ending the year near 5.50 per cent. However it is likely that in the near term interest rates will remain on hold until there is confirmation that Corporate Australia will commit to the ramp up in future spending.

• The result is consistent with the Reserve Bank’s view that growth in the near term is likely to be subdued. No doubt the impact of the natural disasters will have a further detrimental impact on March quarter economic growth. Clearly the focus is the second half of the year and beyond. If the ramp up in investment plans does come to fruition, and given the rebuilding that will take place in flood damaged areas, further rate hikes will indeed be on the cards.
• There is a nice balance in the economy at present. Consumer spending is restrained while business spending is rising modestly. Inflation is under control, wage growth is benign. And according to the Reserve Bank, the job market is not overly tight at present. The Reserve Bank can stay on the interest rate sidelines for a few more months. It’s not nirvana but it is a Goldilocks scenario.
• Investment has been far from uniform, and in past quarters it has been the mining sector that has driven investment. However in the latest quarter investment spending has been largely dominated by the manufacturing sector – providing a degree of comfort given the sustained weakness in the sector.
• Over the coming year it is clear that Australia will be riding on the back of the mining sector. But the non-mining states are unlikely to feel the effects of the rise in incomes until the recovery is well and truly in full swing. No doubt as the recovery gains traction the mining states will be in the driver’s seat and continue to enjoy strong investment flows.
• It is important to highlight that while economic growth is expected to rebound in the second half of the year it is unlikely to be firing on all cylinders. Even the Reserve Bank believes that at present the labour market remains well supplied and that employment growth is likely to moderate to some degree. In fact the latest forecasts only have the unemployment rate dropping just half a per cent over the next two years. More importantly the lift in planned investment is encouraging for the economy as a whole, serving to boost productive capacity and therefore keep any potential inflationary pressures in check.
• According to the latest data average weekly earnings rose by almost 3.9 per cent over the year. Unfortunately this measure tends to be quite volatile and changes in the composition of the labour force – which was especially evident during the global financial crisis – can tend to skew the result. As such the best guide to wage pressures in the economy is the wage price index with the latest figures showing that wage growth is under control.
• The AWOTE data are also affected by compositional changes, such as the shift from full-time to part-time and movements across sectors. But the average weekly earnings data provides useful dollar estimates for wages.
• The latest data on wages highlights what the Reserve Bank has been stating for sometime – that the industrialisation of China and India will lead to major shifts in our economy. Wages in the mining sector are now more than double the earnings in food sectors like cafes and restaurants as well as across the retail sector. And the resources states of Western Australia, Northern Territory and Queensland are dominating in the pay stakes.
• The mining states have been major winners in the pay stakes over the past year, with Western Australia the undisputed leader. However coming up quickly is the Northern Territory. Wages in the ‘top end’ have been stunning, up 7.3 per cent over the past year – well ahead of its counterparts. The industrialisation of China, and in turn, India are paying dividends, and domestically the reallocation of resources in terms of labour to the mining states will only gain in traction over oming year.

What do the figures show?

• Business investment rose by 1.3 per cent after rising by 6.9 per cent in the December quarter. The September quarter result was revised up from the earlier-reported rise of 6.2 per cent. In annual terms investment was up 5.6 per cent on a year ago.
• Spending on buildings fell by 2.8 per cent in the quarter. Spending on equipment rose by 6.1 per cent after easing.

• Spending in the mining sector fell by 4.8 per cent in the December quarter, however investment rose by 7.0 per cent in the manufacturing sector and by 4.6 per cent in “other selected industries”.
• Investment fell in just one of the eight states and territories in the December quarter. The biggest increase was in ACT (up 56.7 per cent),  Northern Territory (up 31.8 per cent), South Australia (up 26.6 per cent), Tasmania (up 24.8 per cent), NSW (up 3.0 per cent), Queensland (up 2.7 per cent), and Victoria (up 2.0 per cent). Spending fell only in Western Australia (down 4.9 per cent).
• The overall deflator for investment goods fell by 0.5 per cent in the December quarter after rising by 0.7 per cent in the September quarter. The price of buildings and structures rose by 0.6 per cent in the quarter while the cost of equipment fell by 1.5 per cent.
• Over the year, the cost of investment goods fell by 1.0 per cent. The cost of buildings rose by 2.5 per cent over the year, while the cost of investment equipment fell by 4.8 per cent over the year.
• The fifth estimate of investment for 2010/11 was $128.9 billion, up 3.6 per cent on the fourth estimate and slightly above the usual (average) upgrade in the quarter of 2.2 per cent. Compared with a year earlier, the fifth estimate of investment was up 16.2 per cent on a year ago.
• The first estimate of investment for 2011/12 was $132.7 billion, up 30.3 per cent on a year ago.

Average weekly earnings

• Average weekly earnings rose by 1.1 per cent in the three months to November after a small 0.6 per cent lift in the previous three months. Wages rose by 3.9 per cent over the year – in line with yesterday’s wage cost index.
• Private sector wages rose 1.3 per cent in the quarter and by just 3.5 per cent over the year. Public sector wages rose by 0.8 per cent in the quarter and by 5.1 per cent over the year. Male wages rose 1.3 per cent in the quarter and by 3.8 per cent over the year. Female wages rose by 1.1 per cent in the quarter and by 4.5 per cent over the year.
• Wages rose most over the year in Transport postal and warehousing (up 10.3 per cent), Electricity, gas, water & waste services (up 9.1 per cent), Financial & insurance services (up 8.8 per cent). Wages were weakest over the past year in Rental Hiring and Real Estate Services (down 2.6 per cent), followed by Administrative and support services (up 1.3 per cent), and Retail trade (up 1.4 per cent).
• Across states & territories, we have calculated average annual wages as follows: NSW $66,565 (up 2.7 per cent over the year), Victoria $64,620 (up 4.5 per cent), Queensland $65,619 (up 4.1 per cent), South Australia $60,414 (up 4.0 per cent), Western Australia $73,148 (up 5.4 per cent), Tasmania $57,808 (up 5.5 per cent), Northern Territory $65,900 (up 7.3 per cent) and ACT $76,367 (up 4.3 per cent).
• The highest average wage can still be found in the mining sector, at $107,510 per year. Next highest is scientific & technical services ($79,612), finance & insurance services ($78,933), and information media & telecommunications ($77,110). The lowest average wage is obtained by workers in the accommodation and food services sector ($47,518), followed by retail trade ($48,422) and “other services” ($53,352).

What is the importance of the economic data?

Private New Capital Expenditure and Expected Expenditure is released quarterly by the Bureau of Statistics. The figures show actual and expected spending by businesses on tangible assets such as new buildings, machinery and office equipment. The figures are obtained after sampling 8,000 private business units.

The data on actual spending is broken-down at a state and industry level and estimates are represented in nominal and price-adjusted (volume) terms. The data on expected spending contains a mix of short and longerterm estimates. The short-term estimates may focus on periods just three months ahead while the longer-term estimates may look as far as 18 months into the future.

What are the implications for interest rates and investors?

• Interest rates will continue to rise as the recovery gains traction. However business and consumers will need a few months to adjust to the current economic conditions. Spending and activity needs to be firmly entrenched before interest rates are raised once again.

– Show quoted text –

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• Wages rose by 1.0 per cent in the December quarter, slightly above market expectations. In annual terms wages are up 3.9 per cent on a year ago – exactly in line with the average growth over the past five years.
• Private sector wages rose 1.0 per cent in the quarter and 3.9 per cent over the year. Public sector wages rose 0.9 per cent in the quarter and 3.9 per cent over the year.
• In a speech today, the Reserve Bank Governor has reinforced expectations that rates are set to remain on hold. Glenn Stevens has stressed, “a careful response is needed” to the fact that the terms of trade gains are being saved rather than spent while the terms of trade is inducing major structural change in the economy.
• The Reserve Bank Governor has stressed the need for improved productivity, a fact borne out by the latest wage data.

What does it all mean?

• Wage growth across the economy is good, rather than being great. Workers in the fastest growing sectors like mining are achieving the highest wage growth while workers in transport, real estate, media and telecommunications are only achieving salary increases that are modestly above the rate of inflation. The main concern is that wages in the utilities – electricity, gas and water – remain lofty despite poor productivity in the sector and disappointing industry growth.
• In an economy-wide sense, the latest wage figures are encouraging. Wage growth near 4 per cent is sufficiently above the rate of inflation to boost consumer purchasing power. A year ago, wages weren’t covering price increases. And current growth of wages wouldn’t be taxing for businesses especially given solid profit growth over the past year.
• Looking ahead though, businesses will need to focus on extracting greater productivity from their workers rather than just putting more workers on payrolls. Wage growth near 4 per cent is fine when productivity growth is near the longer-term average of 1.5-2.0 per cent, but not when productivity is barely growing as it is currently.

• Productivity has been the missing element in the economic debate of the past few years. Federal Treasury has been successful with two of its three P’s – that is, increasing population growth and increasing workforce participation. But if Australia is to sustainably grow at a fast pace, productivity needs to lift.
• The Reserve Bank Governor is again a force of reason when it comes to discussing the terms of trade (ratio of export prices to import prices). Glenn Stevens knows the income boost from the terms of trade would be a worry if the income were being spent, not saved. But he believes the gains are being saved. In addition he is worried about the structural change induced by the terms of trade. In short, he argues for a “careful response”.
• Analysts should heed the Reserve Bank Governor’s advice. A higher terms of trade doesn’t mean that interest rates need to be jacked up – in fact it may turn out to be completely the wrong response.

What do the figures show?

Wage price index

• The wage price index rose by 1.0 per cent in the December quarter after lifting 1.1 per cent in the September quarter. Annual wage growth continued to move away from the decade low of 2.9 per cent set in the December quarter 2010, lifting from 3.5 per cent to 3.9 per cent. In original terms annual wage growth stands at 3.8 per cent.
• On average, wages have grown by 3.9 per cent over the past five years.
• Private sector wages rose by 1.0 per cent in the December quarter while public sector wages rose by 0.9 per cent. Compared with a year earlier, private and public sector wages rose by 3.9 per cent.
• Including bonuses, wages rose by 0.8 per cent in original terms in the quarter with annual growth of ordinary time hourly rates steady at 3.9 per cent in the December quarter.
• Industries with fastest annual wage growth: Electricity, gas, water & waste (up 4.7 per cent), Mining and Professional, scientific & technical services (both up 4.6 per cent), Education & training and Financial & insurance services (both up 4.4 per cent).
• Industries with slowest annual wage growth: Transport, postal & warehousing (up 2.9 per cent); and Rental, hiring & real estate services (up 3.0 per cent); Information media & telecommunications and Arts & Recreation services (both up 3.1 per cent); Other services (up 3.2 per cent),
• Annual wage growth across States & Territories: NSW, 3.8 per cent; Victoria, 3.6 per cent; Queensland, 4.2 per cent; South Australia, 3.9 per cent; Western Australia, 4.0 per cent; Tasmania, 3.3 per cent; Northern Territory, 3.8 per cent; and ACT, 3.7 per cent.

What is the importance of the economic data?

• The Labour 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 Labour 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 labour price index is a measure of hourly pay rates (excluding bonuses).

What are the implications for interest rates and investors?

• The latest wage data represents a rare bit of good news for retailers and other consumer-focussed businesses. A situation where wages are outstripping inflation – but not excessively so – puts more spending power in consumer pockets.
• When you add all the factors up – a strong job market, real wage gains, stable interest rates and record wealth – it points to higher consumer spending ahead. Now you just have to convince consumers to spend.
• The weakness in wage growth over the past year has been a key reason why consumer spending has been depressed. A year ago wages were growing at the slowest pace in a decade – hardly the reason to start spending, especially on non-essential or discretionary items.
• No one at the Reserve Bank would bat an eyelid at the latest wage data – growth is not a threat to inflation. Interest rates are solidly on hold.

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• Petrol sales in the September quarter were the lowest for any September quarter in five years, as consumers and businesses focussed on cutting costs. Unleaded petrol sales totalled 2,873 mega litres in
  the September quarter – marking the weakest quarterly reading in 13 years.
• The Reserve Bank Assistant Governor Philip Lowe has highlighted the concerns about the limited amount of spare capacity in the economy, higher commodity prices and the resulting threat of inflation.
• In seasonally adjusted terms imports fell by 5 per cent in January. The slide in imports suggests that the recent spell of trade surpluses should continue, albeit at a more sedate level given the impact of the
  recent floods.

What does it all mean?

• The weakness in petrol sales in the September quarter of 2010 shows that consumers and businesses remain focussed on keeping costs down. Overall petrol sales recorded the weakest reading for a September quarter in five years. And more importantly unleaded fuels sales were at the weakest levels in 13 years. Added to which the purchase of E10 has risen exponentially.
• Despite more cars being on the road, fuel sales remain sluggish with sales down 1.3 per cent on a year ago – no doubt a further sign of the conservatism that is currently part of the economic landscape. While people are generally confident, they are also keen about saving a buck wherever they can, trimming car usage, and using cheaper variants of fuel such as E10.
• Interestingly premium unleaded petrol sales recorded a modest rise, which may be due to newer vehicles potentially requiring a higher octane fuel.
• In the past the Reserve Bank has highlighted concerns about tight labour capacity, and once again the Assistant Governor Philip Lowe has used the opportunity of a speech in Sydney to highlight the inflationary pressures developing from higher commodity prices and the limited spare capacity in the domestic economy
• As the global economic recovery gains traction it is likely that inflationary pressures will gain traction – particularly in the Asian region. The Assistant Governor noted that if the recent run in higher commodity prices gained traction it is likely that a swifter policy response maybe required.
• The labour market will continue to be a hot button issue for the Reserve Bank. In recent times Reserve Bank liaisons with businesses have suggested that access to labour is at comfortable levels. However as activity and investment ramps up in the second half of the year it is likely that labour shortages – particularly in mining and construction – will become more prominent.
• The Assistant Governor did highlight that the domestic economy is close to full employment. Importantly the anticipated surge in growth over the second half of the year is likely to result in further interest rate hikes as the central banks attempts to ensure inflationary pressures – particularly wage inflation – remains muted. Importantly if the jobs can’t be filled here skilled migration visa’s needs to be increased to allow Australia business the option of tapping foreign workers as needed. And while wage inflation has not been an issue in recent times, CommSec expects wages growth to be an indicator closely watched by the Reserve Bank over the coming year.
• Interestingly the Assistant Governor also warned that despite the current commodity boom it was important to factor in periods of volatility – with particular focus on China, where bouts of weakness was a possibility.

What do the figures show?

• Sales of automotive gasoline (unleaded, proprietary brand, lead replacement and E10) totalled 4654.6 megalitres in the September quarter, down 1.3 per cent on a year ago and the lowest September quarter result in five years.
• Unleaded petrol sales totalled 2873.7 megalitres in the September quarter, marking the weakest quarterly reading in 13 year (March 1997). Alternatively sales of E10 fuel jumped 51.4 per cent over the year to 772.9 megalitres.
• Other data out today shows that imports fell by 5 per cent in January, in seasonally adjusted terms Assistant Governor’s Speech
• “If these inflationary pressures were to intensify, a stronger policy response than seen to date would be likely, increasing the risk of a subsequent sharp slowdown in the region.”
• “This more cautious approach to spending could be quite long lasting, with households using the strong income growth to further improve their balance sheets.”
• “In putting together our forecasts, we have assumed a middle path, with the saving rate staying high, but consumption growth broadly matching income growth over the next couple of years. We will, of course, be looking very closely to see if this is how things evolve.”

What are the implications for interest rates and investors?

• The weakness in petrol sales is a further indicator of the inherent level of conservatism by households and the resulting cautiousness being shown by businesses. A period of interest rate stability is required to ensure that activity levels pick up in the second half of the year.
• The strength of the job market has potential to boost wage growth and therefore inflation. Fortunately at present, wage pressures are restrained, allowing the Reserve Bank to remain on the interest rate sidelines. Given the weakness in consumer spending and lack of activity in the near term CommSec expects the Reserve Bank to remain on the interest rate sidelines until May.

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• How are Australia’s states and territories performing? CommSec has attempted to find out by analysing eight key indicators: economic growth; retail spending; equipment investment; unemployment, construction work done; population growth; housing finance and dwelling commencements.
• Just as the Reserve Bank uses decade averages to determine the level of “normal” interest rates; we have done the same with the economic indicators. For each state and territory, indicators were compared with decade averages – that is, against the “normal”.
• It is clear that the ACT has the stand-out economy at present. In the ACT, unemployment is low, with housing activity, construction, population growth and economic growth all above average. The only blots on the copybook are retail spending and business investment.
• The Western Australian economy had also been an out-performer but it has slipped back to the pack. While construction work is the clear driver, population growth has slowed, dragging on the housing sector. Unemployment is low compared with other states but it has been drifting higher.
• There is little to separate Victoria, South Australia, Northern Territory, Tasmania and NSW. Certainly NSW has been a major improver over the last quarter led by above-average population growth and firmer business investment. But both the Queensland and NSW suffer from weak housing markets – the only two economies where dwelling starts are below decade averages.

Click here to download this document (pdf)

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• The Reserve Bank Board has left the cash rate at 4.75 per cent at its final meeting for 2010. The next meeting is on February 1 2011.
• The Reserve Bank Board notes that lending rates are now a little above average and believes that this tight policy is “appropriate for the economic outlook.”

Click here to download this document (pdf)

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• The Reserve Bank Governor has delivered testimony to the House of Respresentatives Economics Committee. Transcripts of the testimony have been released.

Selected comments from the testimony

• Provided below are some selected comments by Glenn Stevens (Governor), Guy Debelle (Assistant Governor, Financial Markets) and Philip Lowe (Assistant Governor, Economics).

Why lift rates in November, not October:
“Reasonable people can differ about these things—and we had quite a long discussion at both these recent meetings about when a step might be taken—but on balance, the way we came down was that, in October, I personally did not think the case was quite made but I was persuaded that we were across the line in November.”
RBA decision to hike rates in November
“But, having been involved in this process one way or another for quite a long time, I cannot think of very many cases in history where we looked back and thought, ‘Yep, we tightened too soon.’ I can think of several times where we looked back and thought we should have tightened a bit earlier.”

“I think it is better really to move in a reasonably timely fashion to a point where you might be able to rest for a while. That is a better position to be in.”

“Of course, we can never quite say that there definitely will not be any more but I think a lot of people probably would rather be in the position of knowing where they stand, at least for a period of time, than having the continual anxiety.”

Outlook for interest rates

“What it means is that for the period we are going into in the near term I think this is about the right level. At the moment, most commentators do not anticipate and market pricing does not anticipate any further near-term change by us for quite some time. I think that is probably a reasonable position for them to have based on the information we have now.”

Guy Debelle: “The market pricing only has the cash rate rising to five per cent by the middle of next year and rising maybe a little beyond that but not a lot, so not quite as much as the economists you are talking about suggest. (The consensus view of a number of economists is that the cash rate by 2011 will probably be around 5.5 per cent.)”

Glenn Stevens: “I am not sure myself, to be frank, where we are going to be in a year’s time—you cannot be.”

“We may need some more than we have at the moment at some point, but at this stage the expectations are for only fairly gradual and not very close together increases. At this point, I certainly do not want to steer people away from that today.”

“…there will probably be some more next year (rate hikes) and maybe a little bit more after that. It is not unreasonable to think that if you buy the central scenario that we have sketched out, which is that one way or another something will happen to take us off course. That is the central view. It is not unreasonable for people to think that, but that is just saying that it is unlikely there will be anything from us imminently, and I think that is probably a reasonable expectation of people just now.”

“I do not think it is sensible to speculate about increases right now.”

Terms of trade / Two-speed economy

“There is a multi-speed story, even within regions, I think.”

“This is a once or twice in 100 years event.”

“…it is almost a three-speed economy—there is the mining sector, the traded part of the economy that is not mining and is affected by the exchange rate, and the rest.”

Bank profits

“The rate of return on equity that the banks are earning is good. It is probably not, at this point, as high as it was some years ago. As we have said before in the committee, if my choice is between banks with good profits and banks with no profits then I choose the former every time from an overall macroeconomic point of view. People look at the overall size of profits in billions of dollars, but we need to be careful not to forget the size of the capital that is invested in these institutions, because you have to compare the two. The rate of return on equity of 15 or 16 per cent—something like that—that they are earning is good, but many Australian corporates would be looking to earn those kinds of rates of return, not just banks.”

RBA takes changes in bank rates into account

“But in the end the question is really whether all those people with a mortgage are paying seriously higher rates than they should be from an economic management point of view. What I am saying is that I do not think they are, because we have pretty much offset the change in the margins by doing different things in the cash rate from what we would have done had the margins not shifted.”

Wage growth

“We are seeing some pick-up in overall wage growth, at this point not faster than we had expected would be the case, given what has happened in the economy. Where is the line between too high and too low? It is hard to say, but I would think that this is a period now in which we need to proceed with some care.”

“I think, we would probably say those figures we had last week were not view changing. There is a larger increase in the quarter because the fair pay decision comes through in a lump, and in the previous period there was no increase temporarily.”

Unemployment can fall further

“There are at least some grounds to say that there is a bit more scope for labour demand to rise than you might think just by looking at the official unemployment rate on its face. I think that is a reasonable call. Having said that, our general assessment is that the amount of spare capacity in the economy overall is probably reasonably modest.”

Rates now above “normal”

“I would have said that the 4.5 cash rate, which is clearly well below what was normal before, is for all intents and purposes normal in the world we are in now where the margins have widened because it delivered a mortgage rate or a business loan rate that was pretty much the average of the past 15 years. As of the last decision, we have moved above that a bit now. I think we would have to say that, particularly given the increase in loan rates is a bit higher than what we did, monetary policy settings are a bit above normal now.”

Consumer spending

“Consumer spending is more careful and cautious now than it was and retailers will say that. Overall consumption is still growing, probably a little bit below average, but still rising.”

“My guess is that there has been a kind of sea change in people’s attitudes that we would expect to persist for a while.

“Retailers do find this tough. We hear this all the time from them. It is tough. People have money but you have to work harder to get them to part with it now than you did a couple of years ago. That is putting competitive pressure on pricing, which is one of the things that is helping us keep inflation low. A higher exchange rate is helping them do that because the imported products are getting cheaper. We have a bit more of that ahead, I think.”

Handover from public to private sector

“At an aggregate level our assessment is—and this was one of the uncertainties that we faced all year—will this handover occur on schedule or won’t it. We are still not 100 per cent sure, but we think that it is probably going to occur.”

Supply-side deficiencies

Philip Lowe: “There are obviously areas, in transport, in education, in health, where things can be done to improve the ability of the economy to produce goods and services efficiently.”

Glenn Stevens: “…but we are probably going to need more investment in electricity, are we not, over the years ahead, and water? Some of that is being done. There is a fair bit of urban infrastructure that would be desirable, as anybody who lives in any of our major east coast cities—or west coast, for that matter—would think. All of that has to be done, but we have to try to do that at the same time as we build more houses and build more mines.”

National Broadband Network: Public sector undertaking a project that the private sector rejected?

“Whether this is one of them would be another question. But I think you can imagine some projects that the private sector just does not feel it can take the risk on but on which the public sector—which, after all, has a stronger balance sheet than anyone else—might on some occasions be able to accept that risk. But there ought to be, of course, a proper cost-benefit analysis of that case in those instances.”

“We do not have a problem here of public debt sustainability. The fiscal issues that are relevant are the ones that were talked about earlier, such as the effects on demand and so on. I have never felt in recent years that the size of the public debt that we have outstanding is a material problem for the country.”

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• Average weekly earnings rose by 0.4 per cent in the three months to August with private sector earnings up just 0.2 per cent and public sector wages up 1.5 per cent. Wages rose by 4.5 per cent over the year.
• Over the year male wages rose by 4.3 per cent while female wages rose by 5.0 per cent. The average wage stands at $65,457. The highest average wage can still be found in the mining sector, at $107,510 per year.
• Wages in the ACT ($75,936) remains well ahead of the other states and territories due its large public sector. However the clear surprise in wage growth has been the Northern Territory ($64,745), which has
  now elevated itself ahead Queensland ($64,407) and Victoria ($63,809) in the pay stakes.
• The ABARE Mineral and energy major projects publication has confirmed that the mining sector is once again ramping up investment. In the six month to October, 72 projects were at an advanced stage of
  development, totalling a record capital expenditure of $132.9 billion.

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