7 August 2014
The Herald today points out that wages are not increasing.
Note the Westpac's economist saying that the wage increases have been remarkably low. The idea that wages are the last thing to catch up in a cycle is well-known, but this time in, I'm not so sure it's going to happen.
What the Herald, and many commentators miss is that while inflation is only running at 2%, interest rates are up by a whopping 20% this year. It may not sound like much when rates go from 5% to 6%, but it's simple maths to know that that is a 20% increase that must be paid on current interest bills, and that the money is going to come out of the pockets of people who pay mortgages.
Certainly, many mortgages are fixed at the old rates, but many come up for renewal daily, and each and every one will increase by around 20%.
This will cause wage-earning mortgagors to seek more pay.
Normally, during a period of economic growth, this is taken care of by employing companies earning more and being happy to pay larger wage increases.
Is that going to happen in 2014-15? I think they may not, and here's why:
1 The economic boom is largely illusory, and details today of a stagnant economy outside of Christchurch prove that beyond any doubt at all. Were it not for the rebuild, our economy would be deep in the crapper right now.
2 Dairy returns have taken a massive dive over the course of this year, down over 20% from high prices. Fonterra will be paying dramatically-reduced payments to farmers, which will definitely result in reduced agricultural spending.
3 Companies are not really going as well as could be expected, given the alleged boom. I speak to a wide variety of companies, and none of them are doing handstands about the amount of money they're making. In fact, while most have grown, the growth is neither strong nor consistent.
4 The latest confidence survey shows a fall in confidence levels, and I expect it to fall further at the next survey. Things are by no means bad, and the outlook is reasonable, but it ain't no boom.
5 Where is further growth going to come from? Infrastructure spending will carry the can for a little while, but infrastructure spending is finite and the growth may well be negated by diminishing returns from the dairy sector.
6 Forestry and mineral commodities are well down in both price and demand, reducing what had been a lucrative couple of sidelines for our economy up until last year.
There will undoubtedly be pressure on wages over the next 12-18 months, but I am by no means convinced that it will lead to upwards movement.