A clear reduction in living standards

Delivered on By Justin Pyvis

Good morning! ScoMo was out and about yesterday in a last ditch effort to paint his government as the superior economic managers:

“The only way you get wages (rising) is by good, sensible economic policies that drive down unemployment and support growth in the economy, which enables businesses to be able to pay their staff more.”

That’s somewhat accurate. Real wages are actually driven by productivity (labour and capital), which often goes hand-in-hand with economic growth and low unemployment.

While external factors can have a significant impact in the short-term – e.g. mining booms, global financial crises, pandemics – in the longer term (5+ years) domestic policy plays a more significant role, and the current government’s track record certainly isn’t anything to write home about:

It's somewhat troubling that neither major party has even so much as mentioned productivity, a key contributor to long-run prosperity.
It's somewhat troubling that neither major party has even so much as mentioned productivity, a key contributor to long-run prosperity. Source

Reading the tea leaves

Daily % change

AUD/USD

69.5

-1.1%

AUD/CNY

4.71

-0.4%

AU Bond

3.32

-4.1%

US Bond

2.89

-2.8%

ASX200

7,183

+1.0%

S&P500

3,924

-4.0%

Brent (bbl)

108.9

-2.7%

Gold (oz)

1,814

-0.2%

Iron ore (t)

125.0

-2.4%

Bitcoin

29,126

-4.3%

Ethereum

1,961

-6.2%

Note: Brent oil, gold bullion and iron ore prices are the second futures contract. Bond yields are 10-year Treasuries.

The US S&P500 fell -4.04% overnight, its worst single day since June 2020 near the start of the pandemic, with 98% of stocks finishing in the red.

The selloff was triggered by a series of poor results from major retailers including Walmart, Target and Lowe’s, which all warned that higher wages, fuel and other food costs were having a material impact on their profitability. Target’s daily decline of -24.9% was its worst since 1987.

Locally the ASX200 followed the strong lead in the US the night before to rise 0.99%, helped by a falling Aussie dollar due to poor wages data, leading to gains for the big miners (commodities are priced in US dollars), with the materials sector (+2.51%) the best performer on the day.


Food for thought

The inflation tax – real wages have fallen 2.1% since the pandemic struck.
The inflation tax – real wages have fallen 2.1% since the pandemic struck. Source

If it feels like the weekly grocery shop is hitting the hip pocket even harder than the rate of inflation implies, that’s because it is: the latest wages data from the ABS (already massively out of date, by the way) for the March quarter showed an increase of 0.7% from the previous quarter and 2.4% from a year ago. Over the same period, consumer prices rose 2.1% and 5.1%, respectively.

That means real wages – wages minus inflation – fell another 1.5% in just three months during the March quarter, and 2.7% from a year ago. Compared to pre-pandemic levels (December 2021), real wages are now 2.1% lower (see chart above), meaning an average wage earner’s purchasing power is now back to where it was in 2014.

These data have two implications, other than the clear reduction in living standards. One is Saturday’s election – no doubt Labor will ramp up its attacks on the Coalition’s… ‘mixed’ economic record, and what better ammunition than a collapse in real wages?

The other is interest rates. The Reserve Bank of Australia (RBA) spent several months yarning on about needing a “sustained” increase in wages before it raised interest rates. But last month it couldn’t wait any longer, noting that while “aggregate wages growth had been subdued during 2021”:

“…more timely evidence from liaison and business surveys indicated that labour costs were rising in a tight labour market and a further pick-up was likely over the period ahead”.

While the wage price index excludes bonuses, allowances and other measures employers use to compensate workers, and lags reality due to the underfunding of the ABS and multi-year enterprise agreements, the lack of growth is likely to give the RBA some pause.

We still think the RBA will hike rates again when it meets in June – inflation risks getting even further out of hand if it doesn’t – but these data will almost certainly rule out a larger than expected (e.g. 40 basis point) increase.


Chewing the fat


Bits and bytes

🐂 When are politicians not in crisis mode? Scott “Bulldozer” Morrison has already done a U-turn on his promised “gear change”, saying that: “In a crisis again, that’s exactly what I’d have to do… it has served the country extremely well”.

👨‍💻 Modelling the election: “Labor has a 73.2% probability of forming majority government. The Coalition has a 7.5% probability. There is a 19.2% chance of a hung parliament.”

🏗️ Another construction company, Australia’s largest homebuilder Metricon, may be on the brink of collapse after executives held a late meeting yesterday with Victoria’s Treasurer Tim Pallas.

📈 Inflation in the UK hit its highest level in more than 40 years in April, rising 9.0% from a year earlier and double the rate the Bank of England predicted just six months ago.

🍁 In Canada inflation reached 6.8% in April, the highest rate since January 1991, and is now “spreading much more broadly, and at clear risk of getting firmly entrenched”.

🕵️‍♀️ Venture capitalist giant Andreessen Horowitz released its 2022 State of Crypto Report, noting that “We’ve barely just scratched the surface of what’s possible.”

🗳️ According to the AEC, nearly half of all eligible voters have either cast an early vote or submitted a postal vote application (which will not necessarily be used).

📉 Just print more money: “Japan’s economy shrank for the first time in two quarters in the initial three months of the year… [presenting] a challenge to Prime Minister Fumio Kishida’s drive to achieve growth and wealth distribution under his ‘new capitalism’ agenda.”

🏅 But… why? A 51-year-old British man claimed the world record for the longest marathon on a swing, completing “the 36-hour challenge on Sunday, beating the existing record by two hours”.

🐀 Rats fleeing a sinking ship? Twitter lost another three senior employees, including two vice presidents, “a reflection of the uncertainty inside the social media company”.

✈️ A US report claimed that “Flight data [from the black box] indicates a China Eastern Airlines plane that crashed in March was intentionally put into a nose-dive.”

🔬 According to a new working paper, “the shift to remote work explains over one half of the 23.8% [US] national house price increase over this period [December 2019 to November 2021].”

❌ After Finland joined Sweden in formally applying to join NATO, Turkey’s government immediately blocked blocked the start of accession talks, indicating it will seek concessions before it allows the expansion to go forward.