Slow wages growth continues in Australia

Wages growth in Australia continues to show few signs of a meaningful pick-up after the ABS released its Wage Price Index (WPI) data for Q2.   

Wage Price Index — Q2 | By the numbers

• WPI (total hourly rates of pay ex-bonuses for all industries) increased by +0.62% in Q2, with annual growth of +2.14%. Market expectations were for +0.6%q/q and +2.1%Y/Y. In Q1, the WPI increased by +0.47% but revisions saw annual growth scaled back to +1.99% from the initial estimate of +2.07%.

• Private sector wages increased by +0.55% in Q2 to +1.99%Y/Y (prior +0.47%q/q, +1.92Y/Y%)

• Public sector wages grew by +0.61%q/q to +2.41%Y/Y (prior +0.61%q/q, +2.42%Y/Y)

Wage Price Index — Q2 | The details

The WPI data measures changes in the price of wages and salaries associated to particular jobs, keeping quality (job tasks, qualifications, experience levels etc) and quantity (number of hours worked) factors constant. It does not represent income received by employees.

Across the surveyed industries, annual wages growth to Q2 is running faster than the national headline rate (2.14%) for; healthcare +2.7%, education +2.5%, finance and insurance, real estate, public administration accommodation and food services with all lifting by +2.3% and manufacturing, 'other services' and arts and recreation up by +2.2%. 

The healthcare and education industries are major employers in Australia, both ranking in the top-5 sectors by the total number of workers. 

The mining sector continues to show the slowest pace of wages growth — an unenviable position it has held over recent years following the un-wind from the peak of the mining investment boom — at +1.3%. However, as this has occurred fewer people are now working in the sector. The construction sector has been a beneficiary of this, with employment picking-up sharply in recent years to accommodate the upswing in residential work, though wages growth has remained slow.  

The retail sector is Australia's 2nd largest employer, but wages growth remains weak at just +1.5%, which is reflective of the headwinds the sector faces from strong competition and margin pressure from on-going discounting. 

Weakness also continues in professional services at +1.8% — wages growth in this sector has not risen above 2% for 5-years now.    

Across the states, Victoria and Tasmania both saw wages lift by +2.5% over the past year, with Queensland next best at +2.2%. Wages growth in NSW remained at +2.1% and has changed little over the past 3-years despite having the lowest unemployment rate of all the states over this time. A stronger lift in wages growth in NSW is key to driving the national rate. 

Wage Price Index — Q2 | Insights

Over the past year wages growth has lifted, but the progress has been gradual. As of Q2 2017, wages growth was +1.94%Y/Y and is now +2.14%Y/Y. That has been driven by the private sector, which has lifted from +1.78%Y/Y to +1.99%Y/Y. 

This has followed an improvement in the labour market; since June 2017, the unemployment rate is down by -0.3ppt to 5.4% and employment growth is now +2.8%Y/Y compared to +2.2%Y/Y. 

However, excess capacity is still elevated, despite some improvement, with underutilisation (unemployed + underemployed) at 13.9%. 

Greater progress is clearly required to drive a more meaningful pick-up in wages growth, which at present is struggling to run above inflation. 

RBA maintains outlook for gradual progress

The Reserve Bank of Australia’s Statement on Monetary Policy (SoMP) for August was broadly in line with expectations, with gradual progress forecast for the domestic economy over the next couple of years. 

The RBA’s latest forecasts contained a few minor changes to its near-term outlook; GDP growth for Q2 was lifted to +3.0%Y/Y from +2.75%, while inflation is anticipated to decline by year-end — as signaled in the Governor’s statement that accompanied Tuesday’s announcement to hold the Cash Rate at 1.5%.

GDP growth was a little stronger than the RBA had anticipated in Q1, and it is expected to remain above trend (around 2.75%) over the forecast period. 

Growth in the March quarter was broad-based, and the RBA expects this to continue supported by non-mining business investment, public demand and an elevated pipeline of residential construction work. Resource exports — led by LNG — are also a growth driver, but this is forecast to fade by mid-2020. The outlook for household consumption remains highly uncertain and is dependent on the responsiveness of wages growth to a reduction in spare capacity in the labour market.         

On this front, the RBA expects above-trend GDP growth to support a gradual reduction in spare capacity, due to employment growth tracking above growth in the working-age population. These dynamics, however, are anticipated to lift the participation rate — which is already at or near historic highs — a little further, as the positive conditions encourage more Australians to join the labour force or delay retirement. As a result, only gradual improvement is forecast in the unemployment rate — not declining to 5% (estimated to be around the level of full-employment) until December 2020.   

A softer outlook for inflation is due to declines in ‘administered prices’ — areas which are influenced by government policy — over the 2^nd quarter, particularly from electricity and gas, child-care subsidies, TAFE fees and car registration fees in NSW. These declines are expected as once-offs however, underlying inflation — the RBA’s preferred measure — is still expected to remain below the middle of the target (2.5%) over the forecast period.

Today's forecasts are based on the expectation that the Cash Rate moves broadly in line with market pricing, which currently points to no change through to at least the end of 2019.  

Australian housing finance resumes recent slowdown

Australian housing finance approvals resumed their decline in June after a momentary rise last month. Approvals have recorded declines in 6 of the past 7 months, and this follows last week’s CoreLogic Home Value Index where property prices on a national basis extended their run of declines to 10-straight months.  

Housing Finance — June | By the numbers

• New Housing Finance Approvals (no.) to owner-occupiers fell -1.1% in June, compared to the market forecast for 0.0%.  Approvals growth in May was trimmed to +1.0% from the initial estimate of +1.1%.

• By value, total lending commitments (ex-refinancing) fell -1.2%m/m to $A25.156bn (-8.4%Y/Y). 

Housing Finance — June | The details

The declines in June’s headline figures were reflected by weakness across the categories. By value, lending commitments fell by -0.2%m/m to owner-occupiers to $14.744bn (-0.1%Y/Y), while investment lending fell by -2.7%m/m to $10.382bn — intensifying the annual pace of decline from -13.5% to -18.1%.

The value of lending to first home buyers weakened in the month (-6.0%), but activity has been strong over the past year (+22.6%) driven by state government assistance measures in New South Wales and Victoria. The ABS reported that first home buyers accounted for 18.1% of the number of owner-occupier loans written in June, which is the highest level since October 2012.  

Refinancing commitments were down -2.9% in June (+1.0%Y/Y).

Over the quarter to June, the value of ‘new’ lending (excluding re-financing) declined -3.6% — the sharpest slowing since Q4 2015 — due mainly to slowing activity from the investor segment (-7.8%).   

The number of owner-occupied loans fell in every state, except for Queensland (+2.1%), in June. Approvals in New South Wales fell -1.8%m/m and by -0.8%m/m in Victoria. There were also falls in Western Australia (-4.6%m/m), Tasmania (-2.0%m/m) and South Australia (-1.8%m/m).

Despite a stronger quarter for most states — only New South Wales recorded a decline — approvals have seen a broad slowdown over the past year.

State	June (m/m)	Q2 (q/q)	Annual (Y/Y)
NSW	-1.8%	-2.3%	-4.8%
VIC	-0.8%	+3.6%	-0.7%
QLD	+2.1%	+1.4%	-4.8%
SA	-1.8%	+1.4%	-5.4%
WA	-4.6%	+5.9%	-18.7%
TAS	-2.0%	+0.2%	+1.4%

Based on ABS 5,609.0

Construction related loan approvals were flat in June and little changed on the quarter (-0.3%). However, over the past year approvals in this category have declined by -8.1%.

Housing Finance — June | Insights

The weakness seen in today’s data broadly matches with other related indicators of late; building approvals, property prices and auction clearances, which are indicative of cooling residential property market conditions. This appears to be centered on the investor segment, which as noted by the RBA in yesterday’s statement accompanying its policy announcement, is in response to tightening lending standards and APRA’s measures to restrict the pace of credit growth to investor borrowers.        

RBA on hold: unchanged for 2 years

The Reserve Bank of Australia (RBA) held its benchmark Cash Rate at 1.50% for the 22^nd consecutive meeting — equating to 2 years since its last change — this afternoon (2:30pm AEST). This was a unanimously expected outcome by markets, while all 29 economists surveyed by Bloomberg Australia had forecast no change.

The statement which accompanied today’s announcement contained some commentary around the RBA’s outlook for growth, unemployment and inflation ahead of Friday's quarterly Statement on Monetary Policy. 

The RBA retains its forecast for growth in the domestic economy to be “a bit above 3 per cent in 2018 and 2019”. As of Q1, GDP growth was 3.1%Y/Y.

With its growth outlook unchanged and employment growth exceeding working-age population growth, the RBA expects the unemployment rate to decline gradually “over the next couple of years to around 5%”. 

This would represent a slight improvement on its forecasts from May, where the low was 5.25%. Australia’s unemployment rate is currently at 5.4%. With this, the RBA expects that, over time, this will generate “some lift in wages growth” however, the pace is expected to remain low for a while yet.     

Turning to inflation, the RBA has flagged a decline in Q3 later this year to 1.75% from “once-off declines in some administered prices”. Administered prices refer to areas which are impacted by government policy, such as utilities. Further out, the RBA sees inflation rising in 2019 and 2020 to “higher than it is currently”. May’s forecasts for 2019 and 2020 had inflation at 2.25%.

Regarding the housing market, the statement notes the recent declines seen in property prices in Sydney and Melbourne, while it attributes the decline in the pace of housing credit growth to investors to tighter lending standards and the additional supervisory measures introduced by the banking regulator, APRA, last year.    

The RBA has recently noted short-term wholesale interest rates increasing in Australia. In today’s statement, its commentary notes that “money-market interest rates are higher than they were at the start of the year”, although this had not translated into higher retail deposit rates, while some lenders had increased mortgage rates by small amounts.

The other significant change in this statement was its assessment that China’s economy “has slowed a little”, which compares to last month where it noted, “the Chinese economy continues to grow solidly”.  

Today’s meeting was the start of a busy week for the RBA; tomorrow (1.05pm AEST), Governor Philip Lowe is scheduled to deliver a speech titled ‘Demographic Change and Recent Monetary Policy’ and on Friday (11:30am AEST), the Bank will publish its quarterly Statement on Monetary Policy (August) — which includes updated forecasts for GDP growth, unemployment and inflation out to December 2020.

Australian retail sales firm in June

Australian retail sales came in stronger than anticipated in June, making it 3 straight months where the data has surprised to the upside.

Retail sales – June | By the numbers

• Retail sales growth in June increased by +0.4% to $A26.812bn, which exceeded market expectations for growth of +0.3%. Annual growth lifted from 2.5% to 2.9%.

• Retail volumes (sales adjusted for inflation) in Q2 increased by +1.2%q/q, which outpaced the median market forecast for +0.8%. Annually, volumes remained at +2.5%.

Retail sales – June | The details

In June, nominal sales were broadly stronger across the categories — except for department stores (-1.2%m/m). Clothing and footwear led with a rise of +1.7%m/m. This was followed by Cafes and restaurants (+0.9%), while Food and Household goods saw increases of +0.4%m/m. As a broad measure of discretionary spending, sales ex-food increased by +0.4% in June, with annual growth a tick higher at +1.9%.    

Across the states, retail spending continues to be led by Victoria with a +1.1% rise in June. Base effects saw annual growth for Victoria jump 2ppts to +5.8% — comfortably the strongest pace in the nation. Sales growth in New South Wales for June matched the national result (+0.4%) to be tracking at +3% over the past 12-months. In Queensland, spending declined by -0.3%, which slowed annual growth to +0.6%.    

The ABS also reported that online retail continued to gain market share, accounting for 5.7% of total turnover in June. This was up from May (5.6%).

The quarterly data showed that volumes were led by the discretionary areas; Department stores (+2.2%q/q), Clothing and footwear (+2.0%q/q). However, this was on continued discounting with prices for both categories down a further -0.4% in Q2.

Volumes in Q2 also increased for Food (+1.6%) and Household goods (+1.4%) on weaker prices (-0.2% for both). Overall, retail prices declined -0.1% in Q2 and remain virtually flat over the past year (+0.2%).

Retail sales – June | Insights

Today’s result is a positive looking towards Q2 GDP calculations — retail volumes account for around 30% of household consumption, which itself is the largest component of Australia’s economy (around 60%). However, this should be viewed in context because the quarterly profile has been volatile (0.1%, 0.8%, 0.2% and now 1.2%). Annual growth has held at 2.5% over the past 3 quarters. Meanwhile, the ongoing softness in prices highlights pressures from competition in the retail sector and slow wages growth. 

Australia's trade surplus surges in June

Australia’s trade surplus blitzed market expectations in June, but the result points to a more modest contribution from net-exports to Q2 GDP growth.   

International Trade — June | By the numbers

• Trade Balance in June was +$A1.873bn, which was twice the market forecast for a surplus of +$A900m. May’s trade surplus was downgraded to $A725m from $A827m on revision. 
• The change in the monthly trade balance was +$A1.148bn (prior $131m)

• Exports ($ value) increased by +2.6%m/m to $A36.439bn with annual growth at +12.9%
• Imports ($ value) eased by -0.7%m/m to $A34.567bn, while year-ended growth is +10.4%

International Trade — June | The details

The monthly trade surplus averaged $A1.064bn over the past 3-months compared to $1.119bn in Q1. The Australian Bureau of Statistics (ABS) reported that, after seasonal adjustments are applied, its preliminary estimate for the Balance of Payments in Q2 is $2.86bn, which is $490m lower than in Q1. 

In June, the total value of goods and services exported increased by $914m (+2.6%) to $36.439bn. The increase was led by a $542m rise in non-rural goods, with gains spread across 'metal ores and minerals' (mainly iron-ore) +$118m, ‘other non-rural (inc sugar and beverages)’ +$117m and ‘other manufactures’ +$109m. Services exports lifted by $87m in June to $7.385bn, with tourism accounting for all that increase.

For imports, the bill in June eased by $233m (-0.7%) to $34.567bn. This decline was largely from fuel (-$366m) — reflecting weaker prices on global commodities markets. Consumption goods also declined by $14m. Capital goods provided some offset, rising by $313m, which was led by industrial transport equipment (+$107m). Services imports declined by a modest $22m to $7.623bn. 

International Trade — June | Insights 

Net-exports led GDP growth in Q1 (+1.0%) with a strong contribution of +0.4ppt (rounded).  For Q2, this could be more in the range of +0.1ppt. The softening in the estimate for the Balance of Payments could point to a decline in the Terms of Trade over the June quarter, which would be in-line with last week's ABS International Trade Price Indexes data showing that import prices (+3.2%q/q) increased by more than export prices (+1.9%q/q).  

Australian building approvals show resilience in June

Australian Building Approvals rebounded in June, posting a sharp increase that well exceeded market expectations. 

Building Approvals — June | By the numbers

• Total Dwelling Approvals increased by +6.4% to 19,133 vs market expectations for a smaller rise of +1%. After revisions, approvals in May fell by -2.5% — lower than the initial estimate of -3.2%.

• House Approvals increased by +4.4% to 10,179. Last month’s outsized decline was trimmed to -7.9% from -9.0% after revisions.

• Unit Approvals increased by +8.9%m/m to 8,954. Revisions saw the previous month’s estimate little changed at +4.6% compared to the initial result of +4.7%.

Building Approvals — June | The details

June’s headline increase (+6.4%) comes in the context of declines in both April (-6.0%m/m) and May (-2.5%). That weakness saw total dwelling approvals decline by -5.4% in Q2 to 55,559.

Annual growth has softened to just +1.6%, which compares to the recent peak in December 2017 of +13.2%. However, in total, dwelling approvals in the 2017/18 financial year remained at a strong level coming in at 230,721.

The trend data, which smooths the volatility, confirms that dwelling approvals continue to track at a strong level but have certainly eased from late last year.  

Across the states, volatility was elevated with some sharp movements  — particularly in QLD (+37.7%m/m) where house approvals lifted +26.5% following a fall of -19.2% in May. This clearly impacted the national result in June; approvals growth excluding QLD was just +0.7%m/m.

State	June (m/m)	Q2 (q/q)	Annual (Y/Y)
NSW	+3.0%	-4.9%	-11.2%
VIC	-9.6%	-11.0%	+4.1%
QLD	+37.7%	-8.7%	+10.1%
SA	-15.9%	+27.4%	+19.4%
WA	+4.8%	+9.4%	-10.8%
TAS	+3.3%	+6.1%	+22.7%

  Based on ABS 8,731.0  

For alterations and additions, the value of approvals fell by -10.1%m/m and by -5.2% in Q2. 

Non-residential approvals by value fell by -7.0% in June for a quarterly fall of -11.8%.   

Building Approvals — June | Insights

The outlook for residential construction activity is faced with headwinds from property prices which are in decline on a national basis according to CoreLogic’s latest monthly Home Value Index, while auction clearance rates have also slowed dramatically in 2018 to a range of around 50-60% in Sydney and Melbourne. These concerns are heightening when also considering recent tightening that has occurred in lending standards, and this has been linked to a slowing in the ABS Housing Finance data. For now, though, building approvals remain resilient at elevated levels, which points to the risk of a slowing in residential construction activity being delayed.   

Australia's soft inflationary pulse continues

Australia's Consumer Price Index (CPI) data came in softer than anticipated in the June quarter (Q2), with little sign of a shift in the inflationary environment.  

CPI — Q2 | By the numbers

• Headline inflation in Q2 printed at +0.4% and +2.1%Y/Y, which was below the median market forecasts for +0.5%q/q and +2.2%Y/Y (prior +0.5%q/q and +1.9%Y/Y)

• Core inflation (trimmed mean and weighted median seasonally measures) was essentially as expected averaging +0.46%q/q and +1.87%Y/Y (exp: +0.5%q/q and +1.9%Y/Y)

For headline inflation, this made it 7 consecutive quarters where the quarterly figure was below the expected outcome.

Of more relevance from an RBA policy perspective, core inflation slowed in today’s data to +1.87%Y/Y from an upwardly revised pace of +2.01%Y/Y in Q1. This sits a touch below the RBA's forecast (+2.0%Y/Y) published in May's Statement on Monetary Policy, which also show that a lift in core inflation is not seen until mid-2020 (+2.25%Y/Y).

CPI — Q2 | The details

The main contribution to inflation in Q2 came from a strong rise in petrol prices (+6.9%), which added +0.24ppt to the quarterly figure.   

Next most was Health, due mainly to the annual increase in premiums for private health insurance (+3.1%). Alcohol and tobacco prices lifted 1.6% in Q2, with tobacco adding +0.09ppt to inflation and alcohol +0.03ppt.  

The Housing group added a soft +0.03ppt to inflation, with rises for new dwellings (+0.8%) and maintenance (+0.4%). Rents and rates and charges were flat (0.0%), while Utilities fell (-1.2%) on weaker power prices. 

Food and non-alcoholic beverages prices were down -0.4% on the quarter (+0.3Y/Y), which reflected falls for vegetables (-2.9%) and fruit (-2.5%).

Highlighting the intensity of retail competition, prices over the past year fell for appliances -3.1%Y/Y, clothing -3.0%Y/Y, footwear -3.0%Y/Y, furniture -2.7% and vehicles -2.2%Y/Y.  

Looking more broadly, inflation of tradables — from imported sources (accounting for around 35% of the CPI figure) — lifted +0.5% in Q2 but is little changed over the year (+0.3%). This has provided some offset to non-tradables inflation — influenced by domestic factors — although, this softened in Q2 to +0.3 and +3.0%Y/Y.

Separating the impact of areas which are impacted by government policy — from price increases in alcohol, tobacco and private health insurance premiums, the underlying inflationary environment remains muted. 

Inflation for ‘market goods and services ex-volatile items’ — a guide to private sector inflation influenced by demand and supply factors — increased just +0.2% in Q2, and is +1.1%Y/Y in a result that is unchanged from the previous two quarters. 

CPI — Q2 | Insights

Overall, Australia's inflationary pulse remains soft with core inflation back below the RBA's lower target. There was little in Q2's data to indicate that core inflation is set to firm notably over the near-term. Stronger wages growth likely remains the key link, and markets will be looking ahead to the release of the Wage Price Index for Q2 (15/8), which will need to show a sustained strengthening over the quarters ahead to help lift core inflation up into the target range. Cash rate futures are not fully priced for a rate increase for at least the next 18 months.