Bulletin

20 March 2012

Australians less fearful of wage cuts/freezes

Most consumers expect modest gains over the year ahead, but state divergences widening
The March Westpac-Melbourne Institute Consumer
Sentiment survey included a repeat of an extra question on expectations for base wage and salaries over the next 12 months. The results show a significant upgrade compared to September last year although this was mostly a shift from expecting base wages and salaries to be unchanged or lower to expecting a modest 0-4% increase range rather than more significant 4%+ gains. up from exactly half in September and the highest reading since we first began surveying expectations in March 2010. However, the proportion expecting an increase of over 4% was up only slightly from 17% in September to 19% in March. The proportion expecting no change declined from 44% to 41% while those expecting wage falls dropped from 6% to 1%, and those expecting 8%+ gains was unchanged at 7%.

Consumer wage expectations Mar 2012*

% responses expecting: rise no >8% 4-8% 0-4% change fall net% exp rise^ Sep-11 Mar-12 43.4 43.2 43.5 40.6 43.7 48.5 56.3 45.2 58.7 63.7 53.8 77.8

Some 58% of consumers expect their base wage to rise,

Aus 7.4 11.2 39.0 41.3 1.2 NSW 8.7 6.4 32.5 49.9 2.4 Vic 2.6 11.1 45.5 40.3 0.5 Qld 8.3 12.1 43.9 35.3 0.5 SA 12.4 4.7 37.9 43.9 1.2 WA 6.7 35.3 35.8 22.2 0.0 *Figures exclude those reporting "no opinion". ^% expecting a rise minus % expecting a fall.
Source: Westpac-Melbourne Institute

Although it mainly reflects fewer consumers expecting pay cuts

or freezes, the improved outlook for wages is initially a little counter-intuitive. This may be due to the point of comparison being with September when fears around the European crisis were extreme. Over the same period, consumer expectations for family finances have improved 4% and unemployment expectations have only deteriorated slightly by 2% .
60 50 40 30 20 10 0

Consumers expectations for wages

%responses
fall rise 4-8% no change rise >8% rise 0-4%

% responses
Source: WestpacMelbourne Institute

60 50 40 30 20 10 0

The state breakdown throws up some intriguing detail. Wage

expectations improved across the board but gains were muted in NSW, where expectations are still softer than pre-September readings, compared to the strong rises in Vic, Qld and WA where expectations hit new highs. The detail was particularly bullish in WA where an incredible 42% of consumers expect their base incomes to rise by over 4% (vs 26% in September). Qlders also saw more of a gain in this 4%+ category. Fewer NSW and Vic consumers expected such substantive wage rises.

Mar-10

Sep-10

Mar-11

Sep-11

Mar-12

We estimate a 'trimmed mean' of wage expectations by

excluding extreme responses (the top category and an equal proportion from bottom ranges). In March, this 'trimmed mean' wage expectation was 3.4%yr, up slightly from 3.2%yr in September and in line with readings in 2011 and 2010. The official ABS wage inflation was 3.6%yr in 2011.
80 75 70 65 60 55 50 45 40 35 30

Consumers wage expectations by state

% net % expecting rise*
Source: ABS, Westpac, Melbourne Institute Mar-10 Sep-10 Mar-11 *% expecting rise minus Sep-11 % expecting a fall Mar-12

80 75 70 65 60 55 50 45 40 35 30

Unfortunately it is difficult to benchmark responses to this

survey question. In particular, there is no comparable data available for the 2007-09 period during which the labour market cycled from extreme tightness and incipient wage acceleration (especially in WA) to a rapid weakening and drop-off in wages growth to historical lows. However, the back history on businesses wage expectations suggests the current forward views of both businesses and consumers are comparatively benign at around 3.4%yr. Matthew Hassan, Senior Economist, ph (61-2) 8254 2100

Aus

NSW

VIC

QLD

SA

WA

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20 March 2012
Consumers expecting strong wage rises
45 40 35 30 25 20 15 10 5 0 Aus NSW VIC QLD SA WA %
Mar-10 Sep-10 Mar-11 Sep-11 Mar-12

Consumers expecting strong wage rises

% 45 40 35 30 25 20 15 10 5 0 2 0 Aus NSW VIC QLD SA WA 2 0 6 4 6 4 10 8 12 % expecting wages to fall
Mar-10 Sep-10 Mar-11 Sep-11 Mar-12
Source: ABS, Westpac, Melbourne Institute

expecting rise >4%

Source: ABS, Westpac, Melbourne Institute

12 10 8

Wage expectations by age group

90 80 70 60 50 40 30 20 18-24 25-34 35-44 45-49 50-54 55-64 65+ 40 30 20 %
*% expecting rise minus % expecting a fall

Wage expectations: selected groups

%
Mar-10 Sep-10 Mar-11 Sep-11 Mar-12

net % expecting rise*

Source: ABS, Westpac, Melbourne Institute

80 70 60 50

90 80 70 60 50 40 30 20

net % expecting rise*

Mar-10 Sep-10 Mar-11 Sep-11 Mar-12
*% expecting rise minus % expecting a fall

Source: ABS, Westpac, Melbourne Institute

80 70 60 50 40 30 20

male

female

rented

mortgage

freehold

Wages growth: actual vs expectations

5.5 5.0 4.5 4.0 3.5 3.0 2.5
*excludes top band of responses and same proportion at lower end
Sources: ABS, Westpac, Melbourne Institute

Consumer wage and price expectations

%ann
WBC f'casts

%ann
Mar-10 Sep-11 Sep-10 Mar-12

wage cost index

Mar-11

5.5 5.0 4.5 4.0 3.5 3.0 2.5 2.0

5.5 5.0 4.5 4.0 3.5 3.0 2.5

%ann
GST Iraq war
Sources: ABS, Westpac, Melbourne Institute

%ann
Hurricane Katrina Cyclone Larry fuel price surges Qld floods

5.5 5.0 4.5 4.0 3.5 3.0

Expected increase next 12mths: Consumers: 3.4%yr (trimmed)* Westpac: 3.27%yr

inflation expectations (qtly avg) consumer wage expectations (trimmed mean)

2.5

2.0 Dec-99 Dec-01 Dec-03 Dec-05 Dec-07 Dec-09 Dec-11

2.0 2.0 Sep-98 Sep-00 Sep-02 Sep-04 Sep-06 Sep-08 Sep-10 Sep-12

Wage expectations: business vs consumer

7.0 6.0 5.0 4.0 3.0 2.0 1.0
*advanced 12mths; ^consumer expectations measure is trimmed mean expectation; #centred 18mth moving average
Sources: ABS, NAB, Westpac, Melbourne Institute

Expectations: wages, jobs, finances

%ann 7.0 6.0 5.0 4.0 3.0 2.0 1.0 200 180 160 140 120 100 80 60 40 2010 Q1 2010 Q3 2011 Q1 2011 Q3 2012 Q1 index expectations next 12 months family finances unemployment^ wages index
Source: Westpac, Melbourne Institute

%ann Fed min wage decision# private sector wages growth business wage expectations* consumer wage expectations*^

200 180 160 140 120 100 80 60 40

*qtly avg except wages which are Mar and Sep mth obervations ^index inverted: higher readings indicate lower unemp. expectations

0.0 0.0 Dec-97 Dec-99 Dec-01 Dec-03 Dec-05 Dec-07 Dec-09 Dec-11 Dec-13

Past performance is not a reliable indicator of future performance. The forecasts given above are predictive in character. Whilst every effort has been taken to ensure that the assumptions on which the forecasts are based are reasonable, the forecasts may be affected by incorrect assumptions or by known or unknown risks and uncertainties. The results ultimately achieved may differ substantially from these forecasts.