When Australia posted its GDP growth results in the first quarter of 2017, the numbers told two stories. Growth of 0.3%/qtr and 1.7%/yr was on one hand, the slowest growth posted since the GFC-induced slowdown in 2009. Despite the softness it also saw the nation overtake the Netherlands as having the longest uninterrupted period of economic growth of a major nation.
However, the headlines hid a second story, a significant shift in the share of income distribution in the Australian economy. As at Q1 2017, the wages share of the economy was just 51.5%, the lowest level since 1964, and down from 54.5% just 12 months ago. In contrast, the profit share of the economy, has risen to 27.5%, up from 24.1% 12 months ago.
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%. 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.
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.
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