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August 2017 Market Wrap

It was another flat month for the Australian share market in August, with the All Ordinaries index closing the month steady at 5,776.3 points. The Australian Dollar retreated marginally, with 1 Australian Dollar currently buying 79.43 US cents. Once again, the Reserve Bank of Australia (RBA) left the official Cash Rate on hold at 1.50% per annum.

Global share markets provided mixed returns in August. The United States Dow Jones index gained 0.3%, the London FTSE gained 0.8%, the Japan Nikkei 225 fell 1.2% and the Hong Kong Hang Seng Index gained 2.8% for the month.

Economic data released in the month showed that Australian workers are still stuck with the lowest level of wages growth in at least two decades.  The chart below shows the historical Wage Price Index for both private and public sector workers.

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As illustrated above, private sector wages increased an average of just 1.8% last financial year. Meanwhile, inflation for the year to 30 June 2017 was 1.9% - meaning wages in "real terms" decreased by 0.1% last financial year.

Persistent low wage growth is a concern due to its likely negative impact on consumer spending and the difficulty it creates for households in keeping up their debt repayments. Over the last 5 years in particular, we have seen Australian household debt explode.

When borrowing money, you are making expectations in relation to your future income and the ability to service the amount you borrow. If your wages in "real terms" are declining, you have less disposable income and eventually servicing debt becomes a problem.  It therefore stands to reason that for the RBA to be in a position to increase rates in the near term, wage growth needs to improve.

Several economists are now forming the view that economic activity will slow over the next couple of years (in particular as construction activity in the Eastern States slows), and that the RBA will need to strongly consider a rate cut.

The conundrum for the RBA board is that the key benefactor of interest rate cuts over the last 5 years have been Eastern States property investors with rising property values – as households consume more debt at a record pace. As a consequence, RBA won't want to add any further stimulus for households to take on any more debt.

With that in mind, and based on current wage growth rates, it is hard to see when the RBA will be able to consider making any monetary policy changes at all – perhaps a cash rate of 1.50% per annum (which is below inflation) is the "new normal".

For more information, please contact Ryan Love or Michael Clapham on 1300 856 338.

This article is general information only and is not intended to be a recommendation. We strongly recommend you seek advice from your financial adviser as to whether this information is appropriate to your needs, financial situation and investment objectives.