- The outlook for wage growth is critical for supporting household spending, GDP growth, and inflation in Australia.
- Wednesday’s Australian Wage Price Index (WPI) for the September quarter will be a blockbuster data release, showing how people’s incomes are progressing relative to inflation and carrying the potential to generate volatility in Australian financial markets.
- Markets expect a modest acceleration in annual wage growth, helping to underpin the RBA’s view that the next move in official interest rates is “likely to be up”. However, this report has surprised consistently in the past few years, especially to the downside.
If the Reserve Bank of Australia’s (RBA) ambitious forecasts for faster GDP growth, lower unemployment and a slightly faster pickup in underlying inflationary pressures are to be achieved in the years ahead, it will almost certainly need wage growth to rise, especially at a time when many expect Australian home prices will continue to edge lower.
Whether it’s to support household spending, GDP growth, or inflation, the outlook for wage growth will be key.
It means Wednesday’s Australian Wage Price Index (WPI) for the September quarter will be a blockbuster data release, carrying the potential to generate volatility in Australian financial markets.
As explained by TD Securities Global Rates, FX and Commodities Strategy team, Australian wage growth has been fairly atrocious in recent years, especially compared to periods in the past, helping to explain why the RBA’s cash rate remains anchored at its current record low of 1.5%.
“These low-frequency reports are always a marquee event for markets and the RBA, but they have underwhelmed consensus expectations for quite some time,” it says.
“The pace of annual wages growth has barely increased between the December quarter 2016 low of 1.87% and the June 2018 quarter report of 2.14%.
“This lacklustre pickup in wage growth momentum has been undershooting the signals from business surveys and the more traditional Phillips curve approach, where a 5% unemployment rate used to generate annual wage growth closer to 3.5-4% before 2014.”
TD Securities says that before the RBA can lift official interest rates, it will need to see household income growth improve in order to offset weakness in the housing market and an increase in borrowing costs.
Right now, many don’t expect that scenario will arrive for some time yet, helping to explain why financial markets, and an increasing number of economists, don’t see the RBA lifting its cash rate until 2020 at the earliest.
However TD Securities says any surprise in Wednesday’s WPI — be it to the upside or downside — could dramatically shift expectations for the cash rate in the period ahead.
“For some time now the markets see 3% annual wages growth as a the main trigger for higher cash rates, so we need to see this report posting annual wages growth closer to 2.5% to make the markets seriously price in a rate hike for the second half of 2019,” TD says, noting RBA Governor Philip Lowe has previously stated that 2% wages growth
is unlikely to see inflation return to the midpoint of its medium-term 2-3% target.
For the September WPI, the median economist forecast looks for a quarterly increase in hourly wages growth of 0.6%, leaving the change on a year earlier at 2.3%, up from 2.1% in the year to June this year.
While an result in line with expectations is unlikely to generate much of a reaction in financial markets, should the report surprise in either direction, TD says it could lead to a major shift in the Australian dollar and cash rate pricing.
Should the quarterly figure undershoot expectations, printing at 0.5% or below, TD Securities says it will likely see the AUD/USD retest the multi-year low of .7020 struck in late October. It says such a result will also see financial markets price out any possibility of a RBA rate hike arriving before 2020.
At the other end of the spectrum, it says a quarterly increase of 0.8% or more could see the AUD/USD surge to as high as .7400, reflecting the view that pricing for a 25 basis point lift in the cash rate by May next year could rise to as much as 50%.
TD says an result in line with market consensus or slightly above should support dip-buying in the AUD/USD and could see expectations for a RBA rate increase by November next year increase to around 70%.
Adding uncertainty to Wednesday’s report, no one is sure what impact, if any, the increase in Australia’s minimum wage rate on July 1 will have on the data, particularly as a similarly-sized increase in 2017 didn’t translate to a big lift in broader wage growth in 2017.
Some believe the result in the September quarter last year was influenced by one-off factors that will not be repeated this year, although not everyone agrees with two economists polled by Bloomberg forecasting a quarterly increase of 0.5% or less.
Given the importance of wage growth on the outlook for domestic interest rates, and the heightened levels of uncertainty, it will be a blockbuster release.
It’ll arrive at 11.30am AEDT on Wednesday, November 14.
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