Real wages falling, consumer confidence tumbling – this is not what the Reserve Bank and many retailers really want to see is it?
But this is what is now confronting the economy after a second successive quarter fall in real wages, according to the latest Wage Price Index data from the Australian Bureau of Statistics, and a fall in consumer sentiment triggered by the harsh Federal budget.
As retailers confront a slowing in activity since the almost buoyant months of late 2013 and the first quarter of this year, the double impact of the negative budget and contracting real wages (and rising costs) will make for tougher times for many in the country’s shopping malls and strips in coming months.
The situation might change if the CPI continues to ease, as it is expected to do over the next quarter or so. But a further fall in the value of the Aussie dollar, which is becoming increasingly likely judging by the weakness this week, could keep pushing down wages in real terms for the rest of 2014, thereby keeping a lid on inflation.
The ABS data shows that wages rose 2.6% for the year to March, compared to the 2.9% rise in the CPI in the first quarter.
Quarter on quarter wages rose 0.6%, the same as the rise in the CPI in the three months to March.
The annual rate is equal to the 15 year low seen in late 2013.
It was the second quarterly fall in real wages after 13 consecutive quarterly rises (linked to the surge in our terms of trade after the GFC).
That will please many of the moaners and groaners in business who whinge about high real wages (and the Federal Treasury head, Martin Parkinson who went out of his way yesterday to point out the strong rise in real wages in recent years, but not the sharp slowdown in late 2013).
But with costs for things such as electricity and water rising, petrol boosted by the weaker dollar – and the prospects of cuts to benefits and payments for services such as visits to the doctor – there’s every chance consumers will slow their spending in coming months.
Certainly the two consumer sentiment surveys since the budget – the Roy Morgan/ANZ released on Tuesday, and the Westpac/ Melbourne Institute out yesterday, suggested consumers have become more cautious. Both show sharp falls in confidence since the budget.
The Westpac Melbourne Institute Index of Consumer Sentiment fell by 6.8 points in May to 99.7, its lowest point since August 2011.
A reading below 100 points indicates there are more pessimists than optimists on the state of the economy.
The survey was conducted between May 12 and 17, the days following the last week’s federal budget and the surge in negative comments about it in the media and online.
The fall was driven by women, ALP voters and those earning between $60,000-$80,000 and those earning over $100,000. Not surprisingly ALP voters lost confidence, while coalition voters were very supportive.
Real wages, consumer confidence fall, meaning tougher times for retailers
Source: Westpac/Melbourne Institute, AMP Capital
These surveys though are volatile – for example there was a similar fall after the 2013 budget, and the Westpac survey rebounded later in the year, especially after the change of government.
But coming on top of the biggest contraction in real wages in six years, the impact of the budget and the general feeling that the economy is no longer travelling as well as it was at the start of the year, could spell tougher times ahead for retailers.
This slow down is of course good news in two major respects – it lowers the inflationary pressures from the slide in the value of the dollar in 2013.
And it has helped boost employment by 106,000 jobs in the first four months of the year.
The AMP’s chief economist Dr Shane Oliver says mining sector wages growth has slowed to a 14 year low of just 2.4%.
"Low wages growth is another drag on household income and hence spending growth. It also means that there is little pressure on inflation from labour costs, which is at least comforting to the RBA in terms of its ability to keep interest rates low."
But the question now is for how long will the jobs market continue to add jobs. The government forecasts unemployment to rise to 6.25% from the current 5.8%.
And the RBA is telling us the economy is expected to slow in coming months thanks to the impact of slower exports (and lower prices), weak jobs growth (the recovery will be "protracted" the central bank said in the minutes of its May meeting) and the impact of ‘fiscal consolidation‘ which is economist code for big spending cuts.
One sector of retailing to keep an eye on in the ABS sales data each month isn’t the traditional sectors of food or department stores. Watch the Cafe and takeaway sector, the fast growing in the past five years.
If it starts showing a slowing, or even a fall in sales, you know consumers are making small cuts to their spending, with coffees and snacks, plus takeaway food as early, small savings.
Dr Oliver says, "The slump in consumer confidence in May along with very low wages growth are consistent with the RBA maintaining interest rates at current low levels for a while yet.
"We were looking for the first rate hike to be around September/October but given the negative reaction to the Budget this is increasingly looking like it will get pushed into 2015. If consumer confidence does not bounce back in the months ahead it’s likely that there will be increasing talk that the next move in interest rates will be down."
