When Australia posted its GDP growth results in the first quarter of 2017, the numbers told two stories. Growth was on one hand, the slowest posted since the GFC-induced slowdown in 2009. It also saw the nation overtake the Netherlands as having the longest uninterrupted period of economic growth of a major nation. The headlines hid a second story...
Sharing Income in the Australian Economy
Source: ABS. Data to 31 March 2017
Company profits are up, as household incomes weaken…
There has been two key factors behind this development. Income growth is flowing through to company profits, up 17% in 12 months. Higher commodity prices and a lift in the terms of trade have helped the profit share increase. On the household side, the key issue is record low wages growth, currently at just 1.9%/yr, resulting in household income growth falling to a 15-year low.
An increase in part-time work and an elevated unemployment rate helps explain the weakness in household income growth. Part-time employment has risen to 32% of the work force, up from 25% in the mid-1990s and part-time employment growth has been twice that of full-time. Some of this change has been driven by an increase in employment in sectors such as retail, health and tourism – which favour part-time workers. An increase in the female workforce participation rate is also a factor here. But the major cause remains the relatively high unemployment rate, currently at 5.7%, while the underemployment rate is even higher at 8.7%.
….impacting consumer confidence
This subdued household income, at a time when household debt levels are at a record high, has led to a clear deterioration in consumer confidence. The June 2017 Westpac Consumer Confidence survey found consumers have a downbeat assessment of their view of the economy over 1 year and 5 years and overall confidence is around 5% below its long run average.
It is also worth noting that while retail sales were growing by 2.2%/yr to March, households are dedicating a higher share of their wallet towards spending on essentials - such as utilities and rents. This has heavily impacted the share prices of listed retailers.
Leading to low savings….
Low household income growth combined with consumers using savings to maintain spending habits has seen the savings rate near 9 year lows of 4.7%, compared to a peak of 10.9% in Q4 2008. With income growth unlikely to rise anytime soon, households will increasingly be faced with the choice of either lowering their savings rate further (which itself has a limit) or reducing their expenditure on discretionary items even further.
Which lever will policy-makers pull?
1. Boost incomes with another interest rate cut
Traditionally, with inflation just below the Reserve Bank of Australia’s (RBA) 2-3% target, one way to help boost household incomes would be for the RBA to cut interest rates again. But with financial stability risks upgraded in importance under Governor Lowe, this is unlikely. Indeed, we continue to hold the view that the RBA is likely to maintain the 1.5% cash rate well into 2018.
2. Introduce new wages policy for low income earners
The recent minimum wage increase of 3.3%/yr could be the first step. While this covers less than 20% of workers, it could flow through into other wage decisions and could help to correct the wages/profit share dilemma.
3. Boost household income growth through income tax cuts
The other option is fiscal policy. There are currently unlegislated company tax cuts worth around $A40bn over 10 years in the Budget. This would have taken the company tax rate down gradually to 25% in 2026/27 for all companies. Currently the Federal Government is finding it difficult to pass this legislation through the Senate for businesses with over $A50m in turnover. What if some of these company tax cut funds are redeployed to boost household income growth through income tax cuts? New Zealand have just introduced income tax cuts (ahead of an election later this year) and in Australia this would likely be more politically palatable in an environment of rising profit share and lower wages share. This would improve household income growth and boost consumption if the tax cuts were focussed on lower-to-middle income households (who have a greater propensity to consume and help return Australia’s growth closer to trend). Perhaps this is an idea a Government or Opposition in Australia may find attractive ahead of the next election.
References to “we” or “us” are references to Colonial First State Global Asset Management (CFSGAM) a member of MUFG, a global financial group. CFSGAM includes a number of entities in different jurisdictions, operating in Australia as CFSGAM and as First State Investments (FSI) elsewhere. Past performance is not a reliable indicator of future performance. Reference to specific securities (if any) is included for the purpose of illustration only and should not be construed as a recommendation to buy or sell. Reference to such securities or the names of any company are merely to explain the investment strategy and should not be construed as investment advice or a recommendation to invest in any of those companies. Neither MUFG nor any of its subsidiaries are responsible for any statement or information contained in this document. Neither the MUFG Group nor any of its subsidiaries guarantee the performance of any securities or companies mentioned herein or the repayment of capital in relation to such securities or companies. Investments in such securities are not deposits or other liabilities of the MUFG Group or its subsidiaries, and such investments are subject to investment risk, including loss of income and capital invested.