Disposable income fell 0.7 per cent, failing to keep up with the rise in household spending. For households, the ability to save and top up mortgage offset and redraw accounts diminished as interest payable on mortgages rose a whopping 23 per cent.
At 4.5 per cent in the December quarter, the saving ratio was well below the 7.1 per cent recorded in the September quarter, and the lowest since September 2017. As interest rates rise further and cost-of-living pressures persist, consumption will suffer further, or savings will fall further throughout 2023.
Consumers are aware of the uncertainty and challenges ahead, and finally seem to be responding as low consumer confidence levels suggested they would.
We expect to see a continued pullback in spending by consumers. The ongoing strength of the labour market, and higher than normal share of mortgage holders still on very low fixed mortgage rates, could somewhat support consumption in the first half of 2023. But as many of these mortgages roll over to higher variable rates over the coming year, consumption growth will slow and may even recess.
Mining profits surge, while wages moderate in a tight labour market
Company profits in both mining and non-mining industries rose, and total profits as a share of total factor income rose close to a record high of 31.8 per cent. As has been a common story in recent years, mining profits posted a solid increase due to both stronger production and commodity prices. Industries more sensitive to interest rate rises, such as rental, hiring and real estate services, have seen a 11 per cent fall in profits over the year.
With the return of international travel and pent-up demand for domestic travel coming through, accommodation and food services, and transport, postal and warehousing continues to see double digit growth in profits (each up over 30 per cent over the year).
Despite the tightest labour market conditions in decades, the Q4 Wage Price Index (WPI) continued to undershoot market and Reserve Bank expectations. It rose 0.8 per cent in the December quarter, with annual growth picking up to 3.3 per cent (compared to 3.2 per cent in the previous quarter and the Reserve Bank’s 3.5 per cent forecast).
A surprise was the Reserve Bank’s preferred wage measure, average non-farm earnings per hour which did not grow in the quarter and was up only 2.9 per cent over the year.
However, the broad Compensation of Employees (COE) rose by 2.1 per cent during the quarter and over 10 per cent over the year. This is significantly higher than its 10-year average of 4.4 per cent, and indicates that bonus payments and employee movements (which are accounted for in COE but not WPI) have played a key role in lifting the wages bill. The private sector continues to be the main driver, as firms compete for labour.
The Reserve Bank’s liaison program indicates around one third of private sector liaison contacts are reporting sharp increases to wages of above 5 per cent. If this occurs, it will make the Reserve Bank’s job of bringing inflation down even more difficult.