Good things are supposed to come in threes – the best wage price index growth in years, more strong employment growth and the Reserve Bank deputy governor sounding confident about the state of Australian housing. Well, actually two out of three ain’t bad.
The odd one out is the idea that Wednesday’s wage price index figures represented some sort of major breakthrough in dragging wages growth off the floor.
Yes, there was some improvement, again led by the public sector, but the private sector gains were so small as to be marginal.
The Australian Bureau of Statistics graph shows that private sector wages growth continues to run around 0.5 per cent a quarter – a weak start for the federal budget’s promise of 2.75 per cent growth this financial year, 3.25 per cent next year and 3.5 per cent thereafter.
Doggedly-low wages growth remains our key domestic economic challenge. The overall rise of 0.6 per cent for the September quarter was below the more optimistic forecast of 0.7 per cent by a third of polled economists and is actually worse than it looks.
The overall wages rise for the year to September 30 was 2.3 per cent. That’s certainly an improvement on sub-2 numbers last year, but it still means most people’s real take-home pay is going backwards. For anyone on the median wage, nearly a third of that 2.3 per cent goes in tax – leaving an after-tax pay rise of less than the inflation rate.
And keep in mind that the September quarter included the impact of a 3.5 per cent basic wage and awards increase and some much-promoted new enterprise bargaining agreements.
It’s by no means clear that we’re at the start of a trend of steadily improved results, no sign that the capital’s real wages growth strike is ending.
The October labour force statistics were less ambiguously good – more extremely welcome employment growth. It’s the growth in employment, not wages, that is keeping consumption growth ticking over, along with some running down of savings.
But (and you knew there was going to be a “but”) the employment growth isn’t enough to dint the underemployment that is allowing capital’s wages growth strike to continue.
AMP chief economist Shane Oliver summarised it as well as any: “Despite the fall in headline unemployment in Australia this year to 5 per cent, underemployment remains very high at 8.3 per cent, giving a total labour market underutilisation rate of a still very high 13.3 per cent. This contrast to the US, where unemployment is at a near-50-year low of 3.7 per cent and “underemployment” is also very low at 3.7 per cent giving total labour market underutilisation of just 7.4 per cent, which is nearly as low as it ever gets. As a result, a significant acceleration in wages growth looks likely to remains some way off in Australia. “
On the positive side, the quality of the employment growth with its preponderance of full-time jobs continues to hold the promise that the housing price correction won’t turn into anything worse.
As RBA deputy governor Guy Debelle made clear in a speech on Thursday, the RBA has been concerned about what effect a shock like sharply rising unemployment might have on housing credit, not what housing credit risks might do to employment.
Speaking on the catchy topic, “Assessing the Effects of Housing Lending Policy Measures”, Dr Debelle said the authorities had not seen the previous riskiness of borrowing as being the potential source of a negative economic shock.
“My concern is for its potential to be an accelerator to a negative shock from another source. To put it another way, I don’t regard it as likely that household borrowing will collapse under its own weight. Rather, if a negative shock were to hit the Australian economy, particularly one that caused a sizeable rise in unemployment, then the risk on the household balance sheet would magnify the adverse effect of that shock. This would have first order consequences for the economy and hence also for monetary policy.”
Dr Debelle repeated recent RBA confidence that the tightening of lending standards and reduction in investor interest-only loans had gone quite nicely. He reminded listeners that these tighter lending standards had been in place for a while now. They were not a recent phenomenon.
As for the impact on would-be borrowers: “As any of you who have applied for a home loan may know, often the bank is willing to lend you much more than you want to borrow. Now they are willing to lend you less on average, by around 20 per cent.
“How much impact this actually has in aggregate depends on how many people are now constrained by this lower maximum loan size that weren’t previously. Using data from the HILDA survey, we estimate that the share of borrowers who are near their maximum loan and so are affected by this change is small, though for those who are constrained the effect can be quite large. Our assessment is that the aggregate impact is less than it would appear on the face of it.”
So the “credit crunch” impact has been exaggerated by the Doomsters, the interest-only run off is going quite well and housing credit growth, while lower, remains a reasonable five per cent.
Now, if only we could achieve some real wages growth …