CBA: Household income shock arrives when welfare stops

By Gareth Aird, Head of Australian Economics at CBA:

Key Points:

  • The increase in government benefit payments, which excludes JobKeeper, continues to be bigger than the fall in wages and salaries paid, albeit growth in household income has eased over the past few weeks.
  • Fiscal stimulus is plugging the income gap from the big contraction in hours worked.
  • The negative shock to household income is likely to arrive later in the year when government payments are wound back.

Overview

Updated analysis from payments into CBA bank accounts indicates that a counterintuitive dynamic has remained in play to the week ending 8 May 2020. As the economy contracts, spending falls and jobs are lost, our data reveals that a positive income shock has likely been underway so far in the household sector over Q220. More specifically, at an aggregate level the reduction in household income from job losses to date has been more than offset by an increase in government benefit payments. The annual growth rate in our partial read on household income that comprises wages and salaries paid plus government benefits paid has eased over the past two weeks. But it is still running abovepre-COVID-19 levels. This note discusses the details.

Wages and salaries paid

Our wages and salaries data captures all wages and salaries paid into CBA bank accounts. In essence it is picking up changes in the level of employment, wages growth and hours worked. It includes JobKeeper, however we are unable to quantify the amount of JobKeeper within wages and salaries. JobKeeper payments from the ATO to employers only started on 7 May 2020 but employers have been paying it to employees through April (i.e. the ATO is paying employers ~one month in arrears). According to the Government more than 6 million people across 860,000 businesses are now on JobKeeper payments.

Our data indicates that total wages and salaries were running at ~5%/yr over the early part of 2020 (very similar to the national accounts measure of compensation of employees which was 4.8%/yr in Q4 19). That rate of growth dropped sharply by mid-April to be down ~3%/yr, but has since recovered to sit at-0.5%over the year.

The negative wages and salaries shock is best measured by looking at the change in growth rates from where we were tracking pre-COVID-19 to where we are today. It suggests that there has been a contraction in wages and salaries of ~5½% from where we would have been travelling without the COVID-19 pandemic. On the surface this doesn’t seem large enough given the ABS payrolls point to job losses of around 7½% (note that this differs from the change in employment as per the April labour force survey). But the type of jobs that have been lost matters when considering the shock to income. We have lost a disproportionate number of lower income, casual jobs in hospitality and recreation. This means that the hit to the total wages and salaries bill is less than the change in jobs. It is very much the opposite of the situation post mining boom where a disproportionate number of highly paid jobs were lost.

Government benefits paid

Growth in government benefits paid into CBA bank accounts has eased over the past week after running at very elevated rates over April. The last of the cash payments of $A750 to 6.5million Australians were paid on 13 April 2020. We calculate our annual change in benefits on a rolling 28 day basis so the growth rate has slowed as the $A750 payments have “dropped out”. But there has been a partial offset as the number of people receiving JobSeeker has grown. According to our data there has been a ~77% increase in the number of bank accounts receiving JobSeeker. In addition, the JobSeeker payments have doubled from 27 April. The net result has seen total government benefits paid ease to a still very large +35%/yr as at 8 May 2020.

Our partial read on household income

Combining wages and salaries paid into CBA bank accounts with government benefits paid gives us a partial read on household income (it excludes rents, interest earned, dividends and a few other things). Our data indicates that on this measure alone the size of the increase in government benefits paid continues to be bigger than the drop in wages and salaries paid to date. The net result has seen growth in household income rise.

We were very surprised to see the RBA forecast real household disposable income to decline by 8%/yr in Q2 20. We find it very hard to see how the RBA came up with such a forecast given what we have observed in real time in terms of payments into CBA bank accounts. It looks to us like the negative shock to household income is likely to arrive later in the year when government payments are wound back.

The Government has used the analogy of building a bridge to take Australia over the worst of the COVID-19 pandemic. Our income data indicates that bridge has indeed been built. If we do not suffer setbacks in the re-opening of the economy then the damage to the household sector will have been very well contained by the huge fiscal stimulus.

Comments

  1. I’d like to see what would happen if the government put an at least 2 year policy of: overtime pay starts at 36 hours.
    And bump the tax free threshold a couple k.

    I’d expect the price signal to businesses would cause many to hire/rehire. Some would just flat out pay it, but many should hire.

    It’s overall a 5% drop in working hours assuming a 38 hour week. A perfect scenario would result in a ~5% bump in employment. Not bad. I’d expect it to be somewhat less than that.
    I realise the “lump of work” theory isn’t deemed correct, but that doesn’t make it entirely incorrect – at least insofar as a shock goes.
    Demand is down. It’s not going to rise quickly. Especially some sectors like tourism.
    Spread the work, spread the pain.

    Reduce the dole. Reduce unemployment.

  2. That first chart is astonishing.

    How can this do anything except pump the economy (in the short term)? Only if people refuse to spend – or can’t spend enough because some places are shut – and instead save or pay down debt I suppose.

  3. This analysis seems to suggest that because the total $$ Provided by gummint is huge everybody is fine. From what I’ve seen though, the distribution of funds has been very uneven. Some people are doing ok with gummint support but many are not. People have told me about their partners losing jobs in retail with no support forthcoming.

    Cafes near where I live and work are all doing it tough. My local pub and the restaurant strip has been surviving on providing takeaway food….

    I don’t think things are as rosy at this time as this note suggests.

    • I think the total volume counts for a fair bit (even though as you say it’s not always well distributed) but also if the recipients simply aren’t spending it (due to caution or lack of options) then it kind of doesn’t work anyway…

      • True dat. I’m saving every penny for a rainy day, and so is everybody I know. The velocity of money is slowing drastically.

        Once upon a time I would’ve thought this was the rainiest of days…like truly pissing down…but I fear there’s some real downpours coming up.

  4. That’s a massive headless shoulders pattern!

    But somewhat seriously, given:

    “disproportionate number of lower income, casual jobs in hospitality and recreation”

    How many cash-in-hand salary payments, that may have been given a representative number in the accounts for tax purposes and of qualifying for job keeper, are now needing to go through a Cmth bank account?

  5. politically, Scomo shoot himself into a foot by introducing such a generous welfare payments
    once he winds down that welfare, it’s going to look like he killed the economy not the coronavirus response 6 or whatever months earlier

    and for every week that welfare stays in place longer real economy will recover less and slower

    • counterfactual

      SHTF

      No JobKeeker
      No increase to JS

      How would that have played out politically, do you think

      * I think JK was the wrong way to go about it. No JK and have JS or just UBI per MB

      • for his own political benefits, he should have had introduced automatic loan/rent repayment freeze (full or partial) combined with much smaller and short term welfare payments for vulnerable groups (one that have to be extended every month)
        -initial unemployment would have jumped to 20% or 30% but there would be corona to blame and soon unemployment would have started falling quickly which he would be able take credit for (just watch what Trump does in USA – by November elections he will “create” 20 million jobs that were lost due to coronavirus)
        – there would have been no much suffering because loan/rent repayments would reduce need for large part of the income (he can give bank mates 10bn in the name of lost profit – cheap). people would have almost as much money to spend anyway
        – over the next few months as unemployment falls it would have been easy to wind down welfare and move remaining people onto cheap dole
        – in Sep/Oct, repayments/rents resume and we would basically be in the situation where would have been if the unavoidable recession hit, but he would not only look like someone who cannot be blamed for it, but also like someone who already “created” millions of jobs and got recovery on the way

        Instead, we’ll have job loses going on for months and months and more and more look like the result of his policies not corona
        and whenever he ends those payments will have another shock followed by another round of layoffs etc.

        he is like a bad chess player only thinking about next move, not about next 5 or 10 moves

        • Goldstandard1MEMBER

          Remember ‘check mate’ is just the next election not the state of the country

          • every career politician has only one goal and that’s to stay in power for as long as possible – not to do anything else unless needed to achieve that goal

            Scomo will soon fail to achieve any goal … he may be kicked out by his own party before elections

        • drsmithyMEMBER

          he is like a bad chess player only thinking about next move, not about next 5 or 10 moves

          Scotty from marketing probably struggles to think about the last move, let alone any in the future. Has he ever done anything strategic, or even pro-active ?

  6. Goldstandard1MEMBER

    Rosey? I literally know nobody who would say things are rosy.
    Either they lost their job, their job is in hibernation or they have jobs in companies who’s balance sheets are copping pastings and are nervous about forecasting and what actions that will lead to……. Far from rosey, there is a reason the gov had to increase benefits.

  7. Looking at the first chart, it was great for a while outlook at the most recent slope of the line… the trend is now plummeting. Was this simply a burst of back payments, and will be much lower in future? Looks that way if the trend continues.