Australian Markets Weekly

Business confidence near multi-year highs yet consumer confidence near multi-year lows. Firms profitability being driven by productivity and constrained labour costs. Household income growth near zero over past two years – near recessionary levels.


Business upbeat, consumers fragile – Same coin different sides

Business and consumers are in different head spaces. Last week the NAB Survey showed that despite a small pull-back in August, business confidence remains towards the upper end of its past three year range. On the other side, last week’s Westpac/MI survey saw consumer sentiment fall towards the low end of the past five year range.

Business and consumer confidence are normally closely correlated – the historic causality perhaps being that when consumers were confident and spending, business was also happy.

Currently we are seeing one of the largest deviations between the two measures in nearly two decades. What’s going on? There are many factors at play but a key one we expect is what’s happening to wages and household incomes – not much at all.

From a business perspective first, a feature of recent NAB Survey’s has been that firms’ profitability has improved to above average levels yet their employment plans remain below average. Labour costs are also contained. It’s not quite a “jobless recovery” as jobs growth has improved over the past six months – although not as much as last week’s farcical labour force report would suggest. Nonetheless, it’s fair to conclude that businesses remain focused on efficiency and productivity.

The theme of a “bottom line” led profitability drive is not peculiar to Australia. In recent years large United States companies have posted record profits again the backdrop of modest employment and very weak wages growth. The better recent news is that US growth looks to be transitioning – jobs growth, capital expenditures, and wages are all picking up.

Back to Australia where wages grew 2.6% yoy to June 2014, the slowest rate of growth in the near two decades of the ABS wages series. The result of moderate growth in jobs and wages, and CPI inflation still being near 3%, is that there has been virtually no growth in real household disposable incomes over the past two years.

To find income growth as consistently weak as it is now you need to go back to the early 1990’s recession.

Probably adding further to household fragility was the Federal Budget which spoke the harsh truths about the limited ability of Government to keep funding welfare/pensions/education etc. at current levels into the future.

Shouldn’t the rise in house and share prices be boosting consumer confidence? Normally yes and it still might be. It might also be that for some rising house prices are becoming a new source of concern rather than joy. If you don’t own one (and even for parents who do own one their children may not) the dream of owning your own home is increasingly out of reach for some.

Whatever the causes, households are fragile. The Westpac/MI survey tells us people are especially worried about their longer term financial security. On the household fragility theme, look out for NAB’s Q3 Anxiety Index which is out on Wednesday which will have a lot of detail by cohort, State, and class of concern.

Practically, for now consumption and retail sales is being held up by currently rapid population growth and the residential building surge. Many households are fragile though and the rational ones will respond by saving more and spending less.

Australian Dollar – finally lower

AUD/USD fell 3.5 cents last week to be just above 0.90. About time! Even though we could understand why AUD was holding well above 0.90 recently (low volatility and relatively high Australian interest rates), our FX Strategy team have been saying it was just a matter of time before AUD fell. Just as commodity prices have. Even now, AUD @0.90 is a little higher than the 0.89 it started the year at despite the fact the iron ore price has fallen nearly 40% in 2014. NAB’s forecast is unchanged and we see AUD at 0.88 by end 2014 and 0.82 at end of 2015.

Week ahead

Quieter week – RBA Board minutes tomorrow and NAB Anxiety Index Wednesday. Global focus is the US FOMC meeting (Thursday morning Sydney time) where markets are looking for guidance on timing for first Fed rate hike – probably won’t get it.