No evidence mining is causing wage pressure – no boom here

As uncertainty continues to grow over the outlook for the global economy, with the latest offshore data confirming that the US is not the only advanced nation experiencing a slowdown, with those on the other side of the Atlantic such as France, Germany and the UK also seeing their economies almost stall in the second quarter, the latest local data in Australia confirms that our  economy is also under pressure.

Yesterday, Westpac released their the latest reading of its index of leading indicators with the index edging up 0.1% in June after it declined by a similar amount the previous month. The coincident index was up 0.2% after a fall of 0.1% in May. The annualized rate of the leading index however remained unchanged at 1.6%, well below its long term trend of 3.0% and indicating the growth, in aggregate, over the remainder of 2011 and into 2012 is likely to remain positive but on the soft side. More importantly the annual pace of the coincident index, which has a much stronger correlation with the actual GDP outcomes was 0.1%, up from -0.1%. The annual pace of the coincident index suggests that the annual pace of growth is likely to fall when the official numbers are released on September 7 which is a high probability given that a 1.4% rise from last year will to drop out of the calculation for yoy growth when the next data is released. It certainly suggests that growth in Q2 will fall short of the 1.65% the RBA is currently expecting.

We have been pointing to the NAB Business survey’s employment sub-index for some time now and the weakness in the domestic economy has certainly been evident in the employment outcomes during this time. In addition to the NAB employment index, the DEWR skilled vacancies report also suggests that employment outcomes are likely to remain subdued over the coming months. Both internet and newspaper skilled vacancies continued to fall in trend terms in July and while the pace of decline in the annual rate appears to be slowing it still points to weaker employment growth ahead.

The soft employment growth has actually had a dampening effect on wages growth which will be of some relief to the RBA which appears fixated on the threat of a wages/price spiral and breakout. It is clear however that the RBA’s concerns about the potential that robust wages growth in the mining sector would spread into the broader economy looks unfounded. The growth in private sector wages has actually been slowing progressively over the past twelve months with quarterly increases of 1.2% Q3 last year followed by 1% in Q4, 0.9% in Q1 this year and 0.8% last quarter. After rebounding following a sharp slowdown during the GFC the annual rate of growth in the wage cost index slowed in Q2 from its post GFC high in Q1, driven by the slowdown in private wages.

We will get further clarification over recent developments on the wages front later today when the ABS releases Average Weekly Ordinary Time Earnings where the market is expecting a 1% rise in the three months to May with the annual pace edging higher to 4% which would still be below the long run average of 4.5%.

Overall the data suggest that the weakness in the domestic economy, employment and wages growth are set to continue through the second half of 2011.

Clearly this means that the RBA won’t need to hike in a hurry – even in the absence of of the global turmoil. If wage earners are playing ball, we think they understand the linkage between accelerated wage claims and higher mortgage costs, then surely the RBA must recognise that the inflation we have in the economy is of a kind that they can do little about and more importantly that households and workers are taking on the chin.

But I’m not sure with the market pricing which says that the cash rate is going to be down near 3.25% next year based on the OIS curve. This really is pricing in Armageddon and would require not just economic weakness and market dislocation in credit and funding markets. Is it possible? Of course it is. Is it our base case? No, then we would be forecasting Armageddon which by definition is really and truly unforecastable.

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