Surprise lift in wages; Record renovations
Wage Price Index; Construction work

Wages: The Wage Price Index (WPI) rose by 0.6 per cent in the December quarter (consensus: +0.3 per cent) – the fastest growth in 18 months. Annual wage growth remained steady at a record low of 1.4 per cent (the series began over 23 years ago in September quarter 1997). The 1.4 per cent wage growth exceeds the 0.9 per cent lift in consumer prices.

Construction activity: Construction work done fell by 0.9 per cent in the December quarter (survey +1.0) per cent. But residential building rose by 2.7 per cent in the quarter with alterations and additions up by 3.6 per cent to record highs.

The data on wages highlights the costs faced by businesses and gives insights into future interest rate decisions. The data on construction work is important for builders, building material companies and developers.

What does it all mean?

• Clearly workers would love to be getting paid more. But when you consider the amount of spare capacity in the jobs market, the latest wage data is encouraging. Economists thought wages would have grown by only 0.3 per cent in the December quarter, but the actual result was double predictions. The Bureau of Statistics puts much of the gain in private sector wages to employers adjusting hourly earnings back to pre-pandemic levels. So the wage data is yet another sign of the economy gradually getting back to ‘normal’.

• It is always important to compare wage growth to growth in prices (or ‘real’ wages growth). In every state, annual wage growth was at least level with or above the growth of prices in the December quarter. Also encouraging was the fact that quarterly wage growth was the fastest in 18 months.

• The wage data will be greeted positively by the Reserve Bank. But wages will need to grow at a much faster pace than current to change the view that cash rates are on hold until 2024. Long-run average wage growth is 3.1 per cent.

• The construction data is more in the realm of ancient history. States and territories will ramp up infrastructure spending in 2021. And building of free-standing houses is expect to hit record levels this year. The question is whether there is enough tradespeople to do all the work that is planned. Job shortages already exist – especially for labourers and ‘brickies’ in boom-town Perth.

• Aussies have already got started on making their homes comfortable for the new post-pandemic world. More Aussies are likely to be working from home and that means extra rooms and amenities to make the experience efficient and enjoyable.

What do you need to know?

Wage Price Index – December quarter

• The Wage Price Index (WPI) rose by 0.6 per cent in the December quarter (consensus: +0.3 per cent). Annual wage growth remained steady at a record low of 1.4 per cent (the series began over 23 years ago in September quarter 1997).

• Private sector wages rose by 0.7 per cent to be up 1.4 per cent from a year ago. And public sector wages rose by 0.3 per cent to be up 1.6 per cent over the year.

• Including bonuses (total hourly rates of pay), wages rose by 0.4 per cent in the December quarter to be up by 1.3 per cent on a year ago.

• Industries with fastest annual wage growth: Education and training (up 2.4 per cent); Electricity, gas, water and waste services (up 2.0 per cent); and Health care and social assistance & Financial and insurance services (both up 1.6 per cent).

• Industries with slowest annual wage growth: Accommodation and food services (up 0.3 per cent); Rental, hiring and real estate services (up 0.7 per cent); and Wholesale Trade & Administrative and support services (both up 0.9 per cent).

• Annual wage growth across States & Territories: NSW (up 1.4 per cent); Victoria (up 1.3 per cent); Queensland (up 1.6 per cent); South Australia (up 1.4 per cent); Western Australia (up 1.4 per cent); Tasmania (up 1.5 per cent); Northern Territory (up 1.6 per cent); ACT (up 1.4 per cent).

• The Australian Bureau of Statistics noted, “December quarter’s moderate growth was influenced by businesses rolling back short-term wage reductions, returning wages to pre-COVID levels. The phased implementation of the Fair Work Commission annual wage review also had a small positive impact on wages.”

• “In original terms, wages rose 0.5 per cent in December quarter 2020. Private sector wages rose 0.5 per cent, outpacing the public sector rise of 0.3 per cent. Wage freezes have had an impact on the public sector which recorded its lowest annual increase (1.6 per cent) since the commencement of the series.”

• “The latest data showed a large proportion of the private sector wage growth came from the continued restoration of hourly wages back to pre-pandemic levels, following reductions in the June or September quarters 2020.”

Construction work done – December quarter

• Construction work done fell by 0.9 per cent in the December quarter (survey +1.0 per cent). The value of construction work done is down by 1.4 per cent on a year ago to a decade low of $51.17 billion.

• Public sector construction work fell by 3.6 per cent in the quarter after a 1.5 per cent lift in the September quarter.

• Private sector activity was flat in the quarter after a 2.9 per cent fall in the September quarter.

• Construction work fell in four states/territories in the December quarter: NSW (-0.8 per cent); Victoria (-1.0 per cent); Queensland (+3.5 per cent); South Australia (-9.6 per cent); Western Australia (-4.0 per cent); Tasmania (+7.0 per cent); Northern Territory (+11.8 per cent); and the ACT (+3.6 per cent).

• Engineering work fell by 2.8 per cent in the December quarter to be down by just 0.3 per cent over the year.

• Commercial (non-residential) building fell by 2.4 per cent in the quarter to be down 4.5 per cent on the year.

• Residential building rose by 2.7 per cent in the quarter but was still down 0.7 per cent over the year.

• Alterations & additions climbed by 3.6 per cent in the quarter to record highs after rising 7.7 per cent in the September quarter.

• New residential work rose by 2.6 per cent in the quarter – the first rise in nine months.

• Construction costs rose by 0.1 per cent in the December quarter, with building costs up 0.2 per cent and engineering costs down by 0.1 per cent. Over the year, construction costs rose by 0.2 per cent (slowest pace in 11 years) with building costs up 0.4 per cent and engineering costs flat (slowest in 4 years).

What is the importance of the economic data?

• The Wage Price Index has been compiled since September quarter 1997 and measures quarterly changes in wage and salary costs for employees. The index is based on a representative sample of employees, and includes measures of non-wage costs including superannuation, payroll tax, public holiday and workers compensation. The Wage Price Index is useful in measuring wage pressures in the economy. While strong growth in wages would boost domestic spending, it could also serve to lift employer costs and prices and add to economy-wide inflationary pressures. The wage price index is a measure of hourly pay rates (excluding bonuses).

• The Bureau of Statistics releases quarterly estimates of Construction work done. The estimates are based on a survey and cover around 85 per cent of the construction work done in the period. Revised estimates will be released in coming months. The data is useful largely for historical purposes but the work yet to be done estimates provide an early warning signal of future activity. The residential work figures give a good early guide to the strength of residential investment in the national accounts.

What are the implications for investors?

• Real wage growth – annual wage growth exceeding that of prices – is clearly positive for consumer-dependent sectors such as retailers. And there was a significant lift in pay for professional services workers (+0.7 percentage points to 1.5 per cent on a year ago). But the good news is that wage growth is not sufficiently fast enough to restrain hiring intentions of employers. So, this is very much a ‘win-win’ situation.

• The coming lift in construction work is positive for a raft of industry sectors including building products. There will still be winners and losers – winners being those businesses focussed on the building of fee-standing houses and the losers being those more dependent on the building of apartments.

• Renovations are underway in earnest across Australia as home owners rejig their abodes for the new ‘normal’ of working from home. Walls are being put up, others knocked down. Rooms are being added or reconfigured. The renovation work is adding to pressure on home building trades and products.

Published by CommSec