- Australia’s latest wage report will be released tomorrow
- It’s arguably the most important data release in Australia given the RBA needs wages to lift in order to meet its inflation forecasts
- Wage growth has been sitting at, or near record lows for the best part of a year despite strong employment growth
The minutes of the Reserve Bank of Australia’s (RBA) February monetary policy meeting were released to little fanfare earlier today.
There were no big headlines. No market reaction. None, nada, zip.
The reason for that was because it was almost exactly the same as what we’ve heard countless times from the RBA over the past few weeks, including the monetary policy statement the minutes elaborate on.
It still remains optimistic about the global economy and most part of the Australian economy, the notable omission coming from the household sector which is still has some concerns about, even if the commentary was slightly more optimistic than conveyed in December.
As it has for some time, the RBA also warned that a higher Australian dollar could “result in a slower pick-up in economic activity and inflation than forecast”.
Everything else was also much the same with the exception odd tweak here or there.
So we know the question you’re now asking: So why did BI write this?
While the minutes offered nothing new, what they did do was highlight just how important the Australian labour market has become in recent policy deliberations, in particular the linkages between unemployment levels, wage growth and the outlook for inflationary pressures.
As an inflation-targeting central bank, that means wage data has suddenly become one of the most important releases in Australia when it comes to the outlook for interest rates.
It’s arguably the most important.
Although the RBA expects lower unemployment to eventually boost wage pressures gradually, the minutes, like so much other commentary it has offered recently, did little to boost confidence that wage growth has turned the corner.
To be blunt, the bank appears more hopeful than certain that wage pressures will build anytime soon, despite record employment growth last year. Given recent evidence from both home and abroad, it’s understandably uncertain, much like everyone else.
Just look at this commentary from the February minutes as evidence.
Firstly, on the linkages between unemployment and wage pressures in other similar economies to Australia, the minutes noted that despite “strong growth in employment”… “wage growth had remained muted, although some pick-up was expected given the tightness of labour markets”.
It added that “it was also possible there was more spare capacity in labour markets in these economies than implied by conventional estimates”.
That’s an admission that the relationship between unemployment and wage pressures, known as the Phillips curve, may have changed with ultra-low unemployment levels in the US, Japan and UK failing to lift wages by anywhere near the same amount as in the past.
If that’s what’s occurred overseas, it could happen here as well.
Indeed, the RBA noted that “wage growth had remained subdued” in Australia despite stronger labour market conditions last year, adding that “uncertainty remained about how employers would respond as spare capacity in the labour market diminished”.
“Growth in the wage price index in the September quarter had been weaker than expected and wage growth outcomes associated with new enterprise agreements had been lower than the percentage increases incorporated in agreements they were replacing,” the minutes said.
Potentially adding another hurdle to lowering Australia’s unemployment rate, it acknowledged that “it was uncertain how much spare capacity existed [in the labour market] and how quickly it might be eroded”.
Of the four times the RBA used the word “uncertain” in the minutes, three were directly related to wage pressures.
“The minutes suggest that most of the uncertainties around the RBA’s forecast set focus on the labour market,” JP Morgan’s Sally Auld noted.
“The bank expresses uncertainly over the future path of the participation rate, how much spare capacity exists in the labour market, how quickly any spare capacity might be eroded and how soon — and by how much — wages growth might pick up.
“These uncertainties are not unique to Australia, and speak to the influence of global structural forces on the wage setting process and the slope of the Phillips curve.”
One only has to look at Australia’s September quarter Wage Price Index (WPI) for evidence as to stronger labour market conditions not guaranteeing that wage pressures will suddenly pick up.
Even with enormous employment growth and an unusually large increase in Australia’s minimum wage rate at the start of the quarter, there was no sign that wage pressures were building.
If not for the 3.3% increase in the minimum wage rate, wages may have grown at the slowest pace on record during the quarter.
Given recent trends and uncertainty about the outlook, it makes tomorrow’s December quarter wage report all the more important.
The median economist forecast looks for a quarterly increase of 0.5%, leaving the change on a year earlier at 2% — identical to the outcome reported in the September quarter.
Some think the flow-on effects from the minimum wage rage increase will be captured better in this report, potentially creating an upside risk to the quarterly figure.
However, if this report has developed a reputation in recent years, it’s been to undershoot.
Given the RBA has acknowledged that stronger wage growth will likely be required to meet its inflation forecasts, if another downside miss arrives tomorrow the only thing that will become more certain is that interest rates won’t be increased for the foreseeable future.