Australian Business Indicators Q4: Inventories flat

The economic recovery from the pandemic crisis was reflected in today's ABS Business Indicators data for the December quarter. Inventories had stabilised over the second half of the year, while growth in company profits pulled back on the tapering of government transfers and the wages bill lifted further as the labour market continued to improve.     

Business Indicators — Q4 | By the numbers 

• Inventories came in flat Q4 at $164.3bn, broadly in line with consensus (0.1%), leaving the annual pace down by 4.6% through the year (from -4.4%).
• Company gross operating profits pulled back by 6.6% to $109.7bn in Q4 reflecting the unwind from the earlier boost of government transfers, with the annual pace slowing to 15.1% from 18.6%. 
• Wages and salaries advanced by a further 1.4% in Q4 to $147.6bn—in line with an improving labour market—to be marginally higher through the year (0.7% from 0.4%).

Business Indicators — Q4 | The details

Australian business inventories were flat in the December quarter after easing by 0.3% in the previous quarter. Over the second half of the year, inventory levels stabilised (-0.2%) after plunging during the first half (-4.4%) due to the shutdown and weak economic conditions. Over the period, the strongest rebounds have come in wholesalers (-3.3% in the first half to 3.1% in the second half), retailers (-9.9% to -1.6%) and accommodation and food services (-15.8% to -1.1%) with eased restrictions leading to demand returning.   

Growth in gross company profits declined by 6.6% in the quarter but is sharply higher than a year earlier (15.1%). Adjusting for valuation changes in inventories (to make it more aligned with how company profits are measured in the national accounts), company profits fell by 8.1% in Q4. Government transfers through the JobKeeper policy and other cash flow measures shielded businesses during the worst of the pandemic such that company profits lifted by 3.0% in Q1 and then soared by 15.8% in Q2, rising 19.3% through the first half despite what was the nation's first major economic downturn since the recession of the early 1990s. 

With the economy revived from shutdown over the second half, transfers have tapered resulting in gross profits falling by 3.5% over the second half. Mining profits surged in Q4 (11.5%) on rising commodity prices but are up 2.4% over the year, while profits ex-mining contracted 14.4% in the quarter but are still 23.7% higher through the year. 

Beneath this though, many businesses, especially those in service sectors, were still trying to get back on their feet again over the second half of the year as they worked around the remaining restrictions after the earlier shutdown weighed significantly on sales. The reopening led to a rebound, albeit partial as the chart below highlights. Substitution of spending by households away from services to more goods-based consumption has strongly benefitted the retail sector on aggregate where sales advanced by 5.1% over the second half after a 2.1% decline for the first half. 

The reopening was also crucial in supporting the recovery in the labour market. Wages and salaries collapsed by 3.3% in Q2 before rebounding by 2.5% in Q3. This progress continued into Q4 with the wages bill lifting another 1.4% to be 0.7% higher through the year, though this compares with a pre-pandemic pace of 5.0%Y/Y. 

Business Indicators — Q4 | Insights

Australian firms are still very much in recovery mode from the pandemic, though the good news is that fiscal support measures have attenuated what would have otherwise been a very significant shock to incomes. The ongoing recovery, the roll-out of the vaccine domestically and fewer disruptions going forward will help to dissipate the effects of the pandemic crisis.  

Macro (Re)view (26/2) | Really steeper yields

The aggressive sell-off seen in global bond markets during the week has taken most of the attention, leading to cascading effects across other corners of the markets. The message from officials from the Federal Reserve this week was that rising bond yields were a sign of confidence in the economic outlook in the US with the vaccine roll-out expected to pave the way for very strong GDP growth forecasts to be realised over the next couple of years. And this is where the impact of the Fed's shift to its average inflation targeting regime comes in, with Chair Jerome Powell reiterating during his testimony to the Congress this week that policy will not be tightened preemptively, with the current pace of asset purchases ($120bn/mth) to be maintained until its maximum employment and inflation objectives are met. One interpretation is that with the Fed remaining committed to its very accommodative stance amid an improving outlook, the power of its forward guidance on policy is being enhanced and the response in bond markets reflects this. That said, the pace of the move can unsettle, particularly given that it is inflation-adjusted (real) rates driving bond yields higher, which can lead to tighter financial conditions. Fed Vice Chair Richard Clarida delivered a similar message to Chair Powell on policy, noting that a return to pre-pandemic levels of output was still some time away, and the speech from influential Fed Governor Lael Brainard gave an overview of the range indicators that she views as key in forming assessments of the labour market, with the focus being on addressing "shortfalls" in employment from its maximum level. In terms of the data from the US this week, personal income lifted sharply in January (10.0%m/m) boosted by the receipt of recent stimulus cheques, prompting the personal saving rate to leap to 20.5% from 13.7%. This came alongside a 2.4% rebound in personal spending after a weak outcome in the month prior (-0.2%). Meanwhile, the core PCE deflator (Fed's preferred inflation gauge) ticked up to a 1.5% annual pace.        

Over in Europe, officials from the European Central Bank have taken a more cautious line in response to the steepening in yields. Given the ECB's emphasis on favourable financing conditions, President Christine Lagarde noted in a speech that it was "closely monitoring" the moves in longer-term bond yields for signs that could be flowing through to higher rates for businesses and households. Comments from the ECB's Executive Board member Isabel Schnabel took this a step forward by highlighting that higher real yields at such an early stage in the recovery from the pandemic crisis "may withdraw vital policy support too early and too abruptly" for an economy yet to get back on its feet. And then ECB Chief Economist Philip Lane emphasised the flexibility available to it through its PEPP program to address a tightening in financing conditions. In the UK, the latest data on the labour market reported that the unemployment rate had risen to a 5-year high of 5.1% in December, while employment declined by a larger-than-expected 114k over the final 3 months of the year. While the UK Government's furlough scheme has limited the damage of the pandemic, it has still been very significant.

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In Australia this week, the focus was on wages data and on partial indicators that will feed into next week's national accounts and specifically the GDP growth outcome for Q4 (preview here). With Australian Government bond yields rising sharply, including at the front end of the curve, the RBA recommenced purchases of 3-year bonds to drive yields down towards its 0.1% target. These purchases totaled $7bn this week, and this was in addition to its usual amount of purchases under its quantitive easing program ($5bn/wk). Thus this was the largest week for RBA bond purchases ($12bn) since early April in the initial phase of the pandemic (see chart of the week). This all provides plenty of interest ahead of the RBA Board's policy meeting next Tuesday.    

Chart of the week

With the Board's recent guidance around the need for labour market conditions to tighten significantly before policy accommodation can be withdrawn, this week's Wage Price Index (WPI) data for the December quarter suggested this was some way off. While the headline WPI increased by more than was expected in advancing by 0.6% in the quarter, the annual pace held around record lows at 1.4% (reviewed here). Key to driving the rise in Q4 was temporary wage freezes and reductions coming to an end as the economy was moving into gear again, reflected by private sector wages growth outperforming the headline index in lifting by 0.7%q/q to 1.4%Y/Y. Notably, wages growth in professional services increased by 1.2%—its strongest quarterly rise in 8 years—to be up by 1.5% over the year. Some of the other industries heavily affected by the pandemic crisis such as construction, health care, retail and hospitality also saw faster rates of wages growth as restrictions were eased. But, overall, there was little to suggest that stronger wages growth would be sustained in a labour market in which spare capacity remains elevated despite the progress achieved over the second half of last year in reducing it from peak levels.

On this week's other data points, private sector capital expenditure came in well ahead of the consensus estimate in rising by 3.0% in the December quarter—its fastest quarterly gain in 8 years—but was still 7.5% down through the year with firms cutting back or shelving investment plans due to the uncertainty associated with the pandemic (reviewed here). Equipment investment was particularly strong (5.7%qtr), prompted by expanded tax incentives included in last year's Federal Budget to encourage firms to bring forward spending, as well as improving domestic economic conditions. Meanwhile, forward-looking investment plans for 2020/21 were upgraded by 4.8% on the level anticipated 3 months earlier, rising to $121.4bn. But capital expenditure is on track to fall by around 7% compared with the previous financial year, highlighting the impact of the pandemic on business investment. Australian construction activity posted a 0.9% contraction in Q4 in a weaker-than-anticipated outcome (reviewed here). But the main story is the emerging upswing in the residential construction cycle that is being driven by the tailwinds of policy stimulus, such as the Federal Government's HomeBuilder grants, state government incentives for first home buyers and low interest rates. Private sector residential construction activity advanced 2.7% in Q4, with detached new home building up 3.4% and alteration work lifting 3.6%. 

Preview: Australian Q4 GDP

Australia's December quarter national accounts are due to be published by the ABS today (3/3) at 11:30am (AEDT), with GDP growth expected to have advanced by 2.5% in Q4. The economic recovery from the covid-19 recession started at pace in the September quarter with real GDP rebounding by 3.3%, moderating the contraction through the year to -3.8% from -6.4%. However, with the state of Victoria enduring a second shutdown after a surge in virus cases over the winter this weighed considerably on national output in the quarter. 

Over the December quarter, low virus case numbers led to Victoria's reopening and more restrictions being rolled back across the nation, ensuring a continuation in the momentum of the recovery. Reflecting this and a reduction in precautionary behaviour, indicators of mobility improved to their highest levels since the initial phase of the pandemic earlier in the year. 

The recovery in the labour market had also gathered pace, with employment ending the year 0.7% below its pre-pandemic level after it collapsed by 6.7% at the peak of the crisis, while hours worked had rebounded sharply from its 8.8% contraction through the first half of the year rising by 7.3% over the second half. Notably, the reopening in Victoria has enabled it to catch up with the progress achieved in the other states. 

The wider reopening, improving labour market conditions, strengthened balance sheets from fiscal and monetary policy stimulus measures and rising sentiment all contributed to ensuring household spending continued to drive the economic recovery in the quarter. 

Momentum was also building in the housing market, with policy support from low rates and the Federal Government's HomeBuilder scheme driving approvals for detached house construction to record high levels and lifting approvals for alteration work sharply. Established housing market conditions were also strengthening with national property prices now rising again after several months of modest declines during the middle of the year.

Uncertainty and a focus on preserving liquidity has continued to weigh on business investment, though forward-looking capital expenditure plans are now more constructive than earlier in the pandemic. Reflective of reopening dynamics, import volumes lifted sharply in the quarter on higher demand for consumption and capital goods, but services trade remained heavily restricted by the international border controls. 

As it stands | National Accounts — GDP

The reopening of the Australian economy enabled the recovery to start taking shape in the September quarter with real GDP rebounding by 3.3% after contracting by 7.3% over the first half of the year, though this still left Australian GDP 4.2% lower than its pre-pandemic level. In economies offshore, global activity was being switched on again after earlier shutdowns, in turn generating tailwinds for the domestic recovery, most notably through elevated commodity prices. In the September quarter, GDP across OECD economies surged back by 9.2%, but despite very strong rebounds in the US (7.5%), euro area (12.4%) and UK (16.0%), most economies remained well short of their end 2019 levels. A notable exception has been China with GDP growth in Q3 (3.0%) extending its reopening-driven surge from the previous quarter (11.6%).

With the easing of restrictions enabling a much broader range of opportunities to engage in activity and spend, a consumption-led recovery drove the Australian economy in the September quarter. After collapsing by 13.6% over the first half of the year, household consumption saw a robust but partial rebound rising by 7.9% in Q3, with Victoria's return to shutdown preventing a stronger outturn. Services consumption led the way lifting by 9.8%q/q reflecting the reopening of hospitality venues and the resumption of participation in sports and leisure activities. Meanwhile, goods consumption advanced by 5.2%, elevating it above its pre-pandemic level as spending in areas still affected by restrictions (such as overseas travel) was diverted into in-home spending, clothing and footwear and new vehicles. With real disposable incomes rising by 3.3% in the quarter, this rebound in consumption was partly funded by a drawdown in the saving rate, which declined modestly from 22.1% to a still very elevated 18.9%. 

Activity in residential construction posted its first quarterly rise in more than 2 years (0.6%) as alteration worked lifted sharply (5.1%) in response to the Federal Government's HomeBuilder scheme, overcoming a 2.1% contraction in new home building. Business investment continued to be scaled back, falling a further 4.1% in Q3 with pandemic-related uncertainty limiting the visibility over the outlook for demand. Net exports weighed significantly on activity in the quarter subtracting 1.9ppts from real GDP growth. Imports lifted sharply (6.5%) as domestic demand conditions strengthened in response to the reopening, though exports (-3.2%) were weighed by weakness in the global economy and the closure of the international border hitting the tourism, education and transports sectors. 

Key dynamics in Q4 | National Accounts — GDP 

Household consumption — Australian households continued to drive the recovery forward over the quarter as the state of Victoria emerged from its shutdown; retail sales elevated very sharply in November corresponding with the Black Friday promotional period. The strength in household spending reflects eased social distancing and mobility restrictions, a broadening recovery in the labour market, improved consumer sentiment and the effects of fiscal and monetary stimulus that have supported incomes and bolstered balance sheets.

Dwelling investment — Entrenched weakness in the residential construction cycle prior to the pandemic has turned higher on the tailwinds from a range of policy stimulus measures, most notably the Federal Government's HomeBuilder scheme. Residential construction activity posted its strongest quarterly outturn in 2½ years (2.7%) as alteration work advanced by a further 3.6% and new home building lifted 2.6%, led by the detached segment (3.4%).        

Business investment — Firms' investment plans have been crunched under the weight of the uncertainty associated with the pandemic and an earlier focus on capital preservation. But some bright spots came through in Q4 with private sector capital expenditure rising by 3.0%, led by equipment spending (5.7%) in response to measures included in last year's Federal Budget that have enhanced tax incentives for firms to bring forward investment.   

Public demand — Consumption spending advanced by 0.8% in Q4 on continued pandemic-related measures. This combined with a rise in underlying investment of 2.3% in the quarter to drive public demand up by 1.1% and contribute 0.3ppt to activity in Q4.    

Inventories — After subtracting substantially from activity over the first half of 2020, inventories stabilised over the second half. Inventories may add slightly to GDP growth contributing 0.1ppt in Q4. 

Net exports — Import volumes lifted by 4.9% in Q4 on strength in consumption and capital goods as demand conditions rebounded on the reopening, outpacing a 3.8% rise exports that was led by the rural sector. Net exports will subtract 0.1ppt from Q4 GDP growth.  

Australian Capex +3.0% in Q4; 2020/21 investment plans $121.4bn

Australian private sector capital expenditure advanced above expectations in the December quarter, driven by equipment spending in response to the improving momentum in the economy and recent tax incentive measures, while forward-looking investment plans were also on the robust side. 

CapEx — Q4 | By the numbers

• Private sector capex lifted by 3.0% in the December quarter to $29.385bn. This was above the median estimate for a 1% rise and after a 3.1% fall in the previous quarter. Capex was 7.5% lower through the year to Q4, though this is somewhat better than in Q3 (-12.4% revised from -13.8%).

• Equipment, plant and machinery capex lifted by 5.7% to $13.924bn, but this is down 5.2% through the year. 

• Buildings and structures capex ticked up by 0.7%q/q to $15.461bn to be 9.4% lower year over year. 

• Forward-looking investment plans on firms' 5th estimate for spending in 2020/21 was $121.4bn. This was 4.8% higher than the 4th estimate put forward 3 months ago, but it points to capex falling by 7.1% when compared with the same estimate for 2019/20. Meanwhile, estimate 1 for 2021/22 was $105.5bn, which is 3.4% down on a year-to-year (and pre-pandemic) basis.   

CapEx — Q4 | The details

In a positive sign for the economic recovery, capex has rebounded on the reopening, but the strength was concentrated in equipment investment (5.7%) and investment plans for 2020/21 still point to a sizeable decline (-7.1%) in spending when compared with the previous financial year. Measures of business conditions and confidence improved sharply over the second half of 2020 as the economy opened up more widely, while the Federal Budget greatly expanded provisions around tax incentives to encourage investment to be brought forward. The boost in equipment spending aligns with the strength in capital imports, which the international trade data reports lifted by 10.5% (nominal) in Q4 after an 8.1% lift in Q3, consistent with a response to improving domestic demand conditions.

Capex by the non-mining sector lifted 4.9% in Q4 (-9.7%Y/Y), with equipment spending receiving an 8.4% boost, while buildings and structures was little more than flat (0.9%). Meanwhile, mining capex was weaker in the quarter (-1.4%), making this its 3rd consecutive quarterly fall, weighed notably by equipment spending (-5.9%). Buildings and structures lifted slightly (0.4%), leaving total capex in the mining sector modestly lower through the year (-1.2%). 

A summary of total capex across each broad sector and industry is shown in the table below. 

Regarding forward-looking investment plans, Australian firms estimated total capex in the 2020/21 financial year will be $121.4bn, based on the 5th estimate. This figure is 4.8% above estimate 4 ($115.8bn) put forward 3 months earlier, but 7.1% lower than at the same stage of the estimates cycle last year ($130.7bn), though that was before the onset of the pandemic.  

Within this, non-mining capex is on track to fall 8.2% year to year and mining capex is pointing to a 4.4% contraction. This more clearly highlights the weight of the pandemic on investment plans across the economy.  

Today's data also included the 1st estimate of investment plans for 2021/22, which was nominated at $105.5bn. This is 3.4% lower than estimate 1 for 2020/21 ($109.2bn), with mining -5.6% and non-mining -2.2%, but again these are based off comparisions to a pre-pandemic economy. 

CapEx — Q4 | Insights

Capex posted its best quarterly rise (3.0%) since 2012 after a period of cyclical and then pandemic-related weakness. But the gain is much less impressive when considering that it still leaves capex 7.5% down over the year. The reopening leading to improving domestic demand, better business conditions and sentiment and tax incentives to encourage investment appear the key factors behind today's result, in particular the boost to equipment spending (5.7%), which saw its strongest quarterly result in 5 years.   

Preview: CapEx Q4

Australian private sector capital expenditure data for the December quarter are due to be released by the ABS today at 11:30am (AEDT). Uncertainty stemming from the emergence of the covid-19 pandemic has resulted in firms cutting back or shelving investment plans, though spending on capital goods has recently been supported by strengthening domestic demand conditions, improving business sentiment and expanded tax incentives in last year's Federal Budget. 

As it stands | Capital Expenditure

Capex by the private sector fell for a 7th consecutive quarter with a 3.0% contraction in the September quarter, extending the decline through the year to -13.8% from -11.7%. At around $25.9bn, this was the lowest quarterly total for capex since 2007. Buildings and structures investment declined 3.7% to $13.8bn (-15.0%Y/Y) and equipment spending fell 2.2% to $12.1bn (-12.3%Y/Y). 

By sector, non-mining investment declined by 3.0% in Q3 to $17.5bn (-18.2%Y/Y)—its 7th consecutive quarterly decline—with weakness across services (-3.3%) and manufacturing (-1.0%), and mining investment contracted by 3.1% to $8.4bn (-2.8%Y/Y). 

The 4th estimate of capex plans put forward by firms for 2021/21 was nominated at around $105bn; this was 6.3% above the previous estimate from 3 months earlier but 10.3% lower than a year earlier, which highlights the severity of the impact of the pandemic on investment plans. For a full review of Q3's report see here

Market expectations | Capital Expenditure

Further weakness is expected to be reported today, with the market anticipating a 0.3% fall in capex for the December quarter, though the range of estimates varies widely from -2.0% to 5.0%. 

Regarding investment plans, the 4th estimate put forward for 2020/21 in the previous survey was $105bn. However, due to changes in the survey, this will be revised higher to include the education and health care industries, with current estimates indicating this will be around $10bn ($6.6bn for health care and $3.5bn for education). From a revised starting point of around $115bn, applying the average upgrade between estimates 4 and 5 over the past 5 years (around 2.8%) points to a figure of around $118bn for estimate 5 for investment plans in 2020/21. 

This survey will also include the 1st estimate of firms' capex plans for 2021/22. Estimate 1 for 2020/21 was $99.7bn, though this was before the emergence of the pandemic. As such, estimate 1 for 2021/22 will likely be much lower than this figure. Going back to 2019/20, estimate 1 was $92.1bn, so a figure potentially a little higher than this seems a reasonable guide for the 1st estimate of spending plans for 2021/22.    

What to watch | Capital Expenditure

As alluded to above, from the December quarter survey onwards, there will be an expanded range of capex estimates available, including for both the health care and education industries that were previously outside its scope. For a full outline of the forthcoming changes, refer to the advice provided by the ABS here. 

Australian construction activity -0.9% in Q4

Australian construction activity unexpectedly contracted further in the December quarter, with a stimulus-driven boost in residential work unable to offset weakness in the public sector, most notably in engineering work. 

Construction Work Done — Q4 | By the numbers

• Total construction work done (private and public sectors) contracted by 0.9% in the December quarter to $51.171bn, weaker than the median estimate for a 1% rise but better than in Q3 -1.8% (revised from -2.6%). Activity was 1.4% lower through the year from -3.3% in the previous quarter (revised from -4.2%).  
• The headline results were;  
• Engineering work -2.8%q/q to $21.797bn (-0.3%Y/Y)
• Building work 0.6%q/q to $29.374bn (-2.2%Y/Y)
• Residential work 2.7% to $17.865bn (-0.7%Y/Y)
• Non-residential work -2.4%q/q to $11.509bn (-4.5%Y/Y) 

 

Construction Work Done — Q4 | The details 

Australian construction activity was soft in the December quarter falling by 0.9% and has contracted by 1.4% year on year, which is a relatively modest outcome given the scale of the disruptions in other sectors from the pandemic containment measures. On these latest figures, a rigid analysis actually has construction activity higher over the first half of the year (1.3%) despite the national lockdown but then contracting over the second half (-2.7%) during what was a time of reopening. But there could be many explanations for this given the lumpy nature of the data, particularly in the engineering component, and we also know that restrictions on construction in the national lockdown were much less severe than what occurred during Victoria's second lockdown over mid-winter to mid-spring.  

Work done in the private sector was flat in Q4 (-1.1%Y/Y) coming after a 2.9% fall in the previous quarter, which was impacted by the statewide lockdown in Victoria. Contributing to activity was the residential segment (2.7%qtr) in response to policy stimulus measuures that have had a profound effect. Alteration work advanced 3.6% after a 7.1% rise in Q3 to be up by 10.2% on the level from a year ago, driven by the Federal Government's HomeBuilder $25k grants. New home building lifted by 2.6% in Q4 (-2.7%), but with detached approvals having advanced to record highs on the tailwinds of the stimulus response, much stronger gains should be in order over the coming year. 

In fact, a closer look shows that detached new home building has already turned but weakness in higher-density construction, which is less supported by the stimulus and more exposed to the pandemic headwinds from low overseas migration, is weighing on the aggregate figure. 

In the other areas, private non-residential work fell 2.9% in Q4 to be 7.9% down through the year reflecting the hit to business investment from pandemic-related uncertainty. Meanwhile, engineering work was weak in Q4 (-1.6%) but was modestly higher over the year (3.4%). 

Turning to the public sector, total activity was down 3.6% for the quarter (-2.2%Y/Y), with a concentrated decline in engineering work (-4.6%qtr) and a more modest decline in building work (-1.1%). Despite this weakness, public work is expected to pick up over the coming year following increased investment plans in recent state government budgets.  

Construction Work Done — Q4 | Insights

Weakness in public sector work weighed on overall construction activity in Q4, while in the private sector the emerging upswing in residential construction was largely offset by a further decline in non-residential work. Indications are that public investment will turn higher from here, and in the residential sector, particularly in detached housing, work done should be very strong in 2021. 

Australian Q4 Wage Price Index 0.6%; 1.4%yr

Australian wages growth came in stronger than expected in the December quarter, while the annual pace remained around record lows. The ABS reported that wages growth in the quarter was boosted by firms rolling back short-term freezes and reductions that were implemented at the onset of the pandemic, and by the partial effects of the Fair Work Commission's latest wage review decision.   

Wage Price Index — Q4 | By the numbers

• The headline WPI (total hourly rates of pay ex-bonuses) advanced by 0.59% in the December quarter, stronger than the 0.3% pace expected and well up from 0.07% in Q3.  
• Annual growth lifted fractionally (when taken at 2 decimal places) to 1.42% from 1.36% but remains around record lows, though it was forecast to slow further in Q4 to 1.1%Y/Y.

Wage Price Index — Q4 | The details 

Analysis from the ABS published in today's release indicates that a range of temporary factors boosted wages growth by more than was expected. Driving growth in the headline WPI in Q4 was wages growth being restored to pre-pandemic levels in affected industries after earlier freezes or short-term reductions. Meanwhile, the increases to award rates announced by the Fair Work Commission also helped lift wages growth, though with increases to award rates being phased in over 3 quarters (started in Q3) its full impact is yet to be reflected in the data.  

The headline increase in the WPI in Q4 of 0.59% was its strongest quarterly rise since Q2 2019, with the annual pace little changed at 1.42%. Wages growth in the private sector outperformed rising by 0.67% in the quarter (strongest result since Q1 2014), taking the annual pace off its record low to 1.36% from 1.21%. Public sector wages growth was 0.29% in Q4, with base effects establishing a new record low for the annual pace (1.61%). The relative outperformance in private sector wages points to the effects of earlier wage freezes and reductions dissipating with the economic recovery gaining momentum over the second half of the year.   

Across the industries, the standout was in professional services where wages growth lifted by 1.21% in Q4—its strongest quarterly rise in 8 years—elevating the annual pace to 1.52% from 0.76%. Over the first half of the year, wages growth in professional services was negative (-0.08%) reflecting the impacts of freezes and temporary reductions, but over the second half, wages growth rebounded by 1.6% as these were wound back with the economy reopening. 

Some of the industries heavily affected by the onset of the pandemic also saw wages growth pick up over the second half compared to the first half; other (household services) -0.22% in the 1st half to 1.67% in the 2nd half, construction -0.23% to 1.29%, health care 0.65% to 0.94%, retail 0.23% to 0.77% and accommodation and food services 0.08% to 0.23%.

However, as the chart below shows, it is a grim analysis when comparing the current pace of wages growth to the same point a year ago in a pre-coronavirus economy. While that is not surprising, we need to remember that slow wages growth was a significant concern for policymakers before the pandemic. In the short run, the impact of the slowdown in wages has been swamped by the extraordinary fiscal and monetary stimulus response and the level of household saving is now very elevated as a result. At an aggregate level, this should help support spending as the fiscal stimulus through JobKeeper and enhanced JobSeeker payments are withdrawn, though it is far from clear if that is what will happen and if savings are kept higher than anticipated, then concerns about wages growth will again (if it isn't already) be prominent. The RBA has been vocal about wanting to see a tighter labour market generating higher wages growth and it is clear to see why from this next chart, with those conditions a long way from being met.    

Looking at the states, wages growth broadly lifted across the nation as the reopening occurred. Wages growth over the first half in New South Wales was 0.4% and lifted to 1.0% for the second half. In Victoria, it was a similar increase (from 0.3% to 1.0%). For the other states, Queensland picked up to 1.0% in the second half from 0.6% in the first half, while Western Australia (0.9% from 0.5%) and Tasmania 0.9% from 0.6% also advanced, but South Australia was unchanged at 0.7% in both the first and second halves of 2020. 

Wage Price Index — Q4 | Insights

The main takeaway is that with the economy reopening and activity rebounding, earlier wage freezes and reductions appear to have been wound back, which is clearly a positive. But a much stronger labour market will be needed to drive wages growth higher from here.

 

Preview: Wage Price Index Q4

Australia's Wage Price Index data for the December quarter are to be published by the ABS today at 11:30am (AEDT). In response to the pandemic shock and resulting dislocation in the labour market, Australian wages growth has slowed to its lowest level on record. The pandemic and the measures brought in to contain it has led to a substantial increase in spare capacity in the labour market, while many firms have responded to the crisis by implementing wage freezes (some have introduced temporary cuts) and in the public sector freezes and caps on the pace of wage increases have been common.  

As it stands | Wage Price Index

The headline WPI came in weaker than expected in the September quarter at 0.07%, slowing to a new record low at 1.36%Y/Y from 1.82%. The slowdown remains more severe in the private sector where the annual pace declined to 1.21% from 1.68% while public sector wages growth eased to 1.77% from 2.07%, though both were at their lowest on record. The slowdown in wages growth has been broad-based across the economy with 7 of the 18 industries measured by the ABS returning a sub 1% annual pace as of Q3. For a full review of Q3's data see here     

Market expectations | Wage Price Index

Another soft outcome is expected to be reported today with the median estomate for wages growth in Q4 situated at 0.3%, with the range of forecasts between 0.1% and 0.4%. This would see the annual pace slowing further to 1.1%. 

What to watch | Wage Price Index

Slowing wages growth has occurred across the Australian economy (see chart, below), and in most other economies for that matter. With the disruptions from the pandemic stabilising to some degree through a wider reopening in Q4, the industry breakdown will be of interest to see the impact on wages growth, particularly in some of the areas hardest hit by the restrictions.   

Preview: Construction Work Done Q4

December quarter Australian construction activity data are due to be released by the ABS today at 11:30am (AEDT). Disruptions associated with the onset of the pandemic extended previously established cyclical weakness in the sector, though eased restrictions and stimulatory policy will boost housing construction over the period ahead.  

As it stands | Construction Work Done

National construction activity contracted 2.6% in the September quarter and declined by 4.2% through the year. Weighing on activity significantly was the impact of Victoria's shutdown that restricted the access and numbers of workers permitted on sites. Non-residential work drove the declines falling by 3.4% (-14.7% in Victoria), while engineering work contracted by 3.3% and residential work was 1% lower in Q3.

Private sector construction activity was weaker than the headline result, contracting 4.4% in the quarter (-6.9%Y/Y). In the residential segment, alteration work rebounded by 4.6% in the quarter in response to the Federal government's HomeBuilder scheme, though new home building was yet to turn higher on the policy (-2.0%). Non-residential work plunged by 6.4%, weighed by the shutdown in Victoria. Meanwhile, engineering work was also down sharply -7.2%, though this came after a strong increase over the first half of the year (9.9%). Public sector activity advanced by 3.2% in Q3 (4.9%Y/Y), with rises in building (4.6%) and engineering work (2.7%). A full review of Q3's report can be found here

Market expectations | Construction Work Done 

Construction activity is anticipated to advance by 1.0% in the December quarter, between a range of estimates from -1.1% to 5.0%.   

What to watch | Construction Work Done

Key in today's report are the details in the housing segment, with activity moving sharply higher in response to a range of policy stimulus measures from low rates and Federal and State government incentives. Expect non-residential work to remain weak on pandemic-related uncertainty with firms reluctant to invest into these headwinds, though rising investment from the public sector in infrastructure projects should help to attenuate this impact on the economy.