It was a strong GDP print last week… and the truth is even stronger.
I just wanted to pull out two things from last week’s GDP release.
First up, every quarter it rolls around, we’re reminded of our record-breaking run without a technical recession (two negative quarters in a row).
We’re now up to 26.5 years!
It’s pretty impressive.
Of course, to a lot of people, it means we’re doomed. The business cycle moves in… well… cycles. So what goes up must come down.
We’ve had it too good for too long. We’re due.
But this was a point Glenn Stevens made before he retired: just because we haven’t hit that arbitrary recession mark, it doesn’t mean that the business cycle is dead.
And if you look at the chart, we still get all the ups and downs of a regular economy. We just don’t stay negative for long.
And in part, that’s been about population growth, particularly through immigration. If you look at the per capita numbers, then we’ve had several recessions in the past twenty years.
So this whole “we’re due” argument… I’m not buying it.
The other thing that jumped out at me from the GDP release is the building pressure on wages.
One of the mysteries of recent years has been the wageless boom in profits – normally corporate profits and wages move hand in hand. Look at the chart below. The correlation is pretty tight.
But at the end of 2016, we saw company earnings pick up, while wages remained flat.
But now wages pressure is building. It looks like wages are catching up quickly, and they’re currently rising sharply.
Looks like we’re heading towards 5-6% per annum.
It could even be more since wages have been repressed for so long.
This could be just what Australia needs.
If you look at the last quarter of growth, it was driven by a surprising surge in exports, together with strong public spending.
Household consumption was unimpressive.
That’s been the theme for a while now.
The Australian economy needs to pass the baton over from the resources sector to the household sector. So far, households haven’t been willing to take it on.
But with more cash in their pocket, they just might be convinced.
The other thing, of course, is that higher wages will eventually feed through into higher rents.
Rental growth hasn’t been keeping pace with prices, and yields have been compressing.
Growing rents will reverse that compression, and once yields get back to normal – say around 4% nationally, then growing rents will feed through into growing prices.
And so as the household sector starts spending again, they will become the engine of house price growth.
And that’s not a moment too soon either. Largely, recent price growth has been driven by credit. But thanks to APRA and the Royal Commission, the credit channels seems to be running out of puff.
There’s a baton change needed there too.
So this is a story of a giant awakening. The Australian household sector is huge, and it’s too important to go on sitting on the sidelines.
It’s a good news story.