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No relief for workers as new enterprise agreements drive wages down

Related Story: Low wages, high debts and housing bubble threaten the Australian economy in 2018

Related Story: Workers can't bargain on a good pay rise

Has Australia's great wage slump finally bottomed out, with the benefits of booming jobs growth to start fattening wallets and bank accounts?

This week in finance:

• Wage growth measured by the quarterly Wage Price Index (Wednesday)
• Construction work done likely to retrace big bounce last quarter (Wednesday)
• Results season highlights include BHP (Tuesday), Wesfarmers (Wednesday) & Woolworths (Thursday)

It is the supply and demand dynamic the Federal Government insists will kick in soon.

The immutable laws of that pseudo-science economics decree that falling unemployment and greater demand for workers will drive salaries up.

This week's release of the fourth quarter wage price index (WPI) will give an idea of what is going on. The most common forecast is things won't get worse.

Not getting worse is hardly what the workforce is looking for, nor the inspiration the Reserve Bank needs to start lifting its official interest rate from the emergency low setting of 1.5 per cent it has been mired at since August 2016.

Indeed the RBA has fingered desultory wage growth and high household debt as its greatest concerns in getting meaningful momentum into a lumpy economy.

The twin anxieties of wages and debt are not only the cause of much hand wringing at the RBA's Martin Place HQ, but also out in Australia's households and shopping centres.

They are the fundamental reasons why retail is constantly the most downbeat sector in the domestic economy.

Given consumer spending accounts for around 60 per cent of the economy, a consumer strike is hardly just a pebble in the shoe of the great march forward to economic prosperity.

New EBAs driving wages down

The consensus view is Wednesday's WPI will deliver 0.5 per cent growth over the quarter, or 2 per cent over the year — so yes, that is not worse, nor is it better.

The Government will likely ask for a bit more forbearance as the whole, "job, jobs, jobs" vibe fires up.

However, another flat result would be met with little applause from workers, economists and retailers.

"While wages growth appears to have broadly found a base, we remain concerned about near-term outcomes given average wages growth in newly negotiated collective bargaining agreements appears to be even lower than the agreements they replace," Macquarie's economic team recently noted.

Yes, that's right — despite booming jobs growth (around 400,000 new jobs created last year) — wages appear to have been negotiated down.

So what is behind this conundrum of seemingly tighter labour conditions and low wage growth?

The RBA's assistant governor Luci Ellis had a stab at breaking it down in a recent speech based on research from the RBA's business liaison unit.

"The response to that difficulty [of finding staff] has not been to pay people more," Dr Ellis noted.

"Instead, we hear that firms are increasingly using other creative ways to attract and keep staff.

"These include everything from hiring bonuses, to offering extra hours, to increasing perks and workplace conditions."

The odd thing is there is not even a sniff of inflation taking off, yet Dr Ellis said business's perception of their lot is strong demand and rising cost pressures means they won't raise prices.

"They [business owners] appear to believe that competition is so intense that they would lose too much business if they did so [raise prices]," she said.

"So they are especially reluctant to grant wage rises, because this would increase one of their most important costs."

So it all goes around in a loop — low wages, low consumption, anxious business owners, leads to low wages.

Breaking out of it is going to be a drawn out process.

Wage agreements struck under EBAs tend to last years and are likely to act as a dead-weight on wages attempting to climb off the mat for some time yet.

"The weak wages outcomes in new enterprise bargaining agreements in the third quarter were a surprise to us and as a result we are very wary of expecting any lift in near-term WPI growth," the Macquarie team observed.

"Our base case remains that wages and average earnings growth picks up relatively gradually from here."

Good old economics. It will get there in the end. Hopefully.

Construction to retrace huge gain

The only other key piece of the economic jigsaw that will be put in place this week is the quarterly read on construction work done (Wednesday).

After the third quarter's outsized 15 per cent increase, it is likely to be the case of what goes up, will come down — even as quickly as the next quarter.

However, there is no real cause for alarm as Q3 was inflated by a couple of LNG platforms being delivered.

That will wash through this time, pointing to a contraction of —you guessed it — 15 per cent.

That short term gas bubble will burst and given the LNG platforms were built overseas, they won't be counted as a net positive in the quarter's GDP numbers.

Sort of deflating really.

Reporting season disappoints

Investors already shaken by a volatility-free market suddenly turning nasty, haven't been totally comforted by the efforts turned in by large parts of corporate Australia in the February reporting season.

On the estimate of Citi's equities desk, the season is a bit more than halfway through in terms of market capitalisation and a bit less than a third of the way done in terms of companies reporting.

"So far results have been slightly disappointing, with 33 per cent of results missing expectations, while 42 per cent were in-line and only 25 per cent beating," Citi's head of institutional equities sales, Karen Jorritsma, said.

"It was a shaky start to the second week of reporting season with a volatile US lead and then Amcor, Bendigo and Adelaide Bank and JB Hi Fi opening proceedings up on Monday with less than stellar numbers."

Has the correction corrected?

"Crisis? What crisis?" seems to be the view of global markets at the moment.

While it was quiet Friday, Wall Street gained more than 4 per cent last week to be 7 per cent off its recent lows.

The ASX struggled to keep up, adding just 1 per cent for the week and weekend futures trading points to a minor slip on Monday's opening.

Markets on Friday's close:

• ASX SPI 200 futures -0.1pc at 5,850, ASX 200 (Friday's close) -0.1pc at 5,904
• AUD: 79.11 US cents, 63.76 euro cents, 56.39 British pence, 84.07 Japanese yen, $NZ1.07
• US: Dow Jones +0.1pc at 25,219, S&P500 flat at 2732, NASDAQ -0.2pc at 7,239
• Europe: FTSE +0.8pc at 7,295 DAX +0.8pc at 12,452 Euro Stoxx50 +1.1pc at 3,427
• Commodities: Brent oil +0.9pc at $US64.90/barrel, Gold flat at $US1347/ounce, Iron ore (Steel Home) +0.2pc $US76.76

Over at Deutsche Bank, the equities strategy team believes the recent sell-off looks to have gone far enough.

Deutsche Bank's Tim Baker said there were a number of reasons behind this thinking, but primarily very expensive US equities were behind the meltdown and now they are looking more reasonable value.

"Other asset classes have been fairly resilient," Mr Baker said

"The growth story remains intact, supplemented by US fiscal policy, around 80 per cent of S&P500 companies have had earnings upgrades, easily a record high."

So what does this mean for the ASX?

Mr Baker said the ASX200 is now down 5 per cent from its recent peak and not only outperforming other markets but also below Deutsche Bank's fair value estimate.

Indeed, on Deutsche Bank's measure the market is trading at the biggest discount to fair value in two years.

"At the sector level, most sectors have fallen 3-to-6 per cent from their peaks, with energy and utilities the biggest underperformers," Mr Baker said.

"Notably, mining has held up, suggesting the global growth picture is solid."

However, with bond yields on the rise, yield stocks — particularly infrastructure and utilities — may not have totally unwound according to Mr Baker.

BHP's, Wesfarmers' and Woolworths' results

Results season hits warp speed this week with BHP (Tuesday), Wesfarmers (Wednesday) and Woolworths (Thursday) likely to hog the limelight.

UBS mining analyst Glyn Lawcock is on the bullish end of the spectrum for BHP.

His forecast for an underlying half-year of $4.66 billion is about 10 per cent above the consensus view.

Copper is expected to be the big mover with earnings up close to 75 per cent, while the iron ore business — which accounts for a tad under 40 per cent of BHP's total earnings — is likely to slip on 12 months ago.

Dr Lawcock is also fairly bullish on dividends, forecasting an interim dividend of 56 US cents per share, compared to a consensus view of 49 cents — and way above the glum 16 cents paid two years ago.

"BHP continues to strengthen its balance sheet and has almost reached its net debt target of US$10-to-15 billion improving the outlook for shareholder returns," Dr Lawcock said.

Investors will be looking for an update on the sale of the US shale gas business, but given the company is only six months into a two year process, there may not be a lot to say.

In the battle of the supermarket aisles, Woolworths is expected to continue its fightback against Wesfarmers' champion Coles.

Wesfamers result won't be helped by a $1.3 billion confession season impairment booked on the struggling Bunnings expansion in the UK.

The memories of the Masters debacle are still too raw for Woolworths to get too uppity about such things.

Deutsche Bank's Michael Simotas says having checked with industry players, Woolworths appears to maintained its momentum and continued to trade well over Christmas while Coles has been weak.

He is forecasting like-for-like sales growth at Woolworths of 4.5 per cent for the half and 0.5 per cent at Coles.

Importantly, Deutsche Bank expects meaningful margin expansion at Woolworths, while margins may well shrink at Coles.

Overall, Mr Simotas said Woolworths' underlying half year profit is likely to be up a healthy 13 per cent to $941 million, while Wesfarmers is likely to book a more pedestrian gain of around 2.6 per cent to $1.6 billion.

Subtract the Bunnings UK impairment and the net profit will be wafer thin — wafer thin in Wesfarmers terms that is.

Results

Date	Event	Companies reporting
Monday 19/2/18	Half-year results	Beach Petroleum, Brambles, Domain Holdings, Mantra, NIB, Seek
	Full-year results	Invocare
Tuesday 20/2/18	Half-year results	BHP, Monadelphous, Sandfire Resources, Seven West Media, Super Retail, Vocus, Western Areas
	Full-year results	APN Outdoor, Oil Search
Wednesday 21/2/18	Half-year results	APA, Fairfax, Fletcher Building, Independence Group, Lend Lease, McMillan Shakespeare, Stockland, Wesfarmers, Worley Parsons
	Full-year results	Coca-Cola Amatil, Santos, Scentre Group
Thursday 22/2/18	Half-year results	Alumina, Aristocrat, Asaleo Care, Charter Hall, Crown Resorts, Flight Centre, Link, Nine Entertainment, Oz Minerals, Perpetual, Platinum, Qantas, Qube
	Full-year results
Friday 23/2/18	Half-year results	Oceana Gold, Southern Cross Media, Woolworths
	Full-year results

Australia

Date	Event	Forecast
Monday 19/2/18
Tuesday 20/2/18	RBA minutes	Insights from this months meeting. No surprises here
Wednesday 21/2/18	Wage price index	Q4: Stuck in a rut, +0.5pc QoQ and +2pc YoY
	Construction work done	Q4: Went up 15pc in Q3, could go down 15pc this time as effects of a completed LNG plant wash through
Thursday 22/2/18
Friday 23/2/18

Overseas

Date	Event	Forecast
Monday 19/2/18	US: Presidents' Day	Public holiday
Tuesday 20/2/18	EU: Consumer confidence	Feb: Tipped to dip, but not alarmingly so
Wednesday 21/2/18	US: Federal Reserve minutes	Insights into Feb 1 meeting. Another rate rise is getting closer
	US: Manufacturing & composite PMIs	Feb: Manufacturing and services sector activity expanding solidly
	EU: Manufacturing & composite PMIs	Feb: Manufacturing and services sector activity expanding solidly
Thursday 22/2/18	UK: GDP	Q4: Same as previous quarter with growth around 1.5pc YoY
	EU: ECB minutes	Insights into meeting on Jan 24-25 where there no change
Friday 23/2/18	EU: Inflation	Q4: Core inflation still very low, around 1pc YoY

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