Deutsche Bank explains why Australia's latest wage report may undershoot expectations

Scott Barbour/ Getty Images.
  • Australia’s latest wage report will be released later today.
  • Most economists believe the report will show that wage pressures are slowly building, but not everyone is convinced.
  • Deutsche Bank thinks there’s a risk quarterly growth may undershoot citing elevated unemployment and a diminished impact of Australia’s minimum wage increase in July last year.

Australia will release data on wage growth today.

Given the implications for inflation, household spending, economic growth and fiscal revenues for the government, there’ll naturally be a lot of interest on the report.

Wage growth looks to have bottomed, but no one is really sure how quickly it will accelerate, especially with unemployment and underutilisation in the Australian labour market still elevated compared to historic norms.

Most economists believe the report will show that wage pressures are slowly building, but not everyone is convinced.

Tim Baker, Macro Strategist at Deutsche Bank, is one who thinks today’s wage report could undershoot expectations, potentially creating increased uncertainty on the outlook for Australian interest rates.

“Quarterly wages data will be important — the market expects gradual improvement of 0.6%, but we see downside risk,” he says.

“The past two quarters likely incorporated an outsized minimum wage increase, so the underlying softer pace of wage growth may now become evident.

“Australia joined the low wage growth club with a lag, so is likely to lag on the way out. And the unemployment rate seems comfortably above full employment, unlike most peers.”

This chart from Deutsche shows the evolution in annual wage growth in Australia compared to that seen in the US and Canada

Deutsche Bank

Should the data undershoot today, Baker says it will make Australia look stark compared to Canada and the US where wage growth has accelerated in recent reports.

Citibank, Morgan Stanley, Morgans Financial and RBC Capital Markets see annual wage growth in Australia decelerating in today’s report, forecasting that it will fall back to 2% from 2.1% in the December quarter last year.

Only a handful of economists expect the year-on-year rate will accelerate, including the Commonwealth Bank who see it lifting to 2.2%.

There is increased uncertainty about today’s report given an unusually large 3.3% increase in Australia’s minimum wage rate in July last year may not be as influential as it was in prior quarters.

The wage price index will be released at 11.30am AEST.

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