Here's what economists are saying about Australia's wage report

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  • Australian hourly wage rates excluding bonuses increased by just 0.47% in the March quarter, leaving the annual increase unchanged at 2.07%.
  • The vast majority of economists expect weak wage growth will persist until unemployment levels fall.
  • The RBA and federal government expect wage growth to accelerate in the years ahead. Right now, there’s little sign that’s happening.

Another Australian wage report has come and gone, delivering largely unwelcome news for workers.

According to the Australian Bureau of Statistics (ABS), hourly wage growth excluding bonuses rose by 0.47% in the March quarter, missing expectations for an increase of 0.6%.

The disappointing result left annual growth in wages at 2.07%, just below the 2.08% level reported in the prior quarter.

However, while the annual rate was largely unchanged, that masked some unwelcome news for those working in the private sector, the largest employer in Australia.

The average wage increase for those workers grew by just 1.92%, the same pace as consumer price inflation (CPI) over the same period. That means for the vast majority of workers, real wage growth went nowhere over the year.

In comparison, public sector wages outperformed, lifting by 2.35% over the year.

And while annual wage growth including bonuses did accelerate, lifting to an annual rate of 2.7% from 2.1% in the prior quarter, this may reflect the low base effect from a year earlier, rather than the much mooted pickup in wages expected by the RBA and Federal Government in the years ahead.

While financial markets initially reacted negatively to the report, selling down the Australian dollar and bidding up Australian bond futures, those moves have now largely been reversed.

Whether that indicates the report was not as bad as the headline figure would suggest, or due to offshore factors, is hard to determine given other underlying factors driving financial markets at present.

Now that they’ve had time to peruse the wage report, it’s time to see what economists have made of it all.

Does it have any implications on the outlook for interest rates, or forecasts from the government to return Australia’s budget to surplus?

Let’s find out.

Tom Kennedy, JP Morgan

At the microscopic scale, the data reveal that quarterly wage growth has now decelerated for three-straight quarters, from 0.56% in Q2 2017 to 0.47% in Q1 2018. Moreover, today’s wage print is the second weakest in the history of the series dating back to 1997, with wage growth only slower in Q3 2016.

The annual rate was unchanged at 2.1% and remains consistent with the view that although the cyclical low in the annual rate has most likely past, wage growth is still considerably weaker than the historical relationship with unemployment would suggest.

The weakness in the wage data is particularly striking given the strength of labour demand over the past year. Indeed, the economy added 415,000 new jobs in 2017, the strongest year of outright job creation since records began in the late-1970s and in the top-five when scaled by the size of the labour force.

The conflicting wage and employment growth outcomes can be squared by factoring in the strength of the supply side, evident by the rise in the participation rate. These supply and demand dynamics mean the unemployment rate has been relatively unchanged at 5.5% in recent history, comfortably above our estimate of NAIRU (5%) and an indication that slack remains across the labour market.

Felicity Emmett, ANZ

We remain confident that wage growth has troughed and is likely to improve gradually through this year and next.

Interestingly, wages including bonuses rose a sharper 2.7% year-on-year, up from 2.1% in Q4. While some of this reflects base effects, on a quarterly basis this measure is growing faster than wages excluding bonuses.

We have argued for some time that while firms are finding it more difficult to find suitable labour, they are reluctant to lock themselves into a permanently higher wage bill given a perceived inability to pass on any increased costs in the form of higher prices. Paying higher bonuses potentially gives firms additional flexibility around pay rises.

Belinda Allen, Commonwealth Bank

Today’s numbers suggest that any thought of a return to more normal wages growth is still some time away. Despite strong employment growth over the past year, there has yet to be any flow through to higher wages. This suggests there is still a significant amount of spare capacity in the labour market. Underemployment and underutilisation rates remain elevated.

Both the RBA and the Federal Budget forecast wages growth to return to above 3% over coming years, but there is limited evidence to date that we are getting closer to this.

Today’s data reinforces our view that the first move higher in the official cash rate is some time off. We have the first hike pencilled in for February 2019. Lower dwelling prices, higher funding costs and tightening lending standards will also lengthen the RBA’s patience.

Stronger wages growth will be needed before the RBA lifts rates.

Justin Smirk, Westpac

Annual wages growth has now been flat at 2.1% since Q3 2017. So this is a very modest lift from the record low of annual wage inflation of 1.9% in the four quarters before Q3 2017. You can still describe wage inflation as being near historic lows.

There may have been a modest uptick in wages from the latest round of enterprise bargaining but given that the wage rises for new enterprise agreements continue to lag behind the average for all agreements, new agreements remain a drag on broader wages and thus portends a continuation of the subdued wages environment. This is despite the lift in the minimum wage and slightly higher public sector wage outcomes.

Ivan Colhoun, NAB

Little joy in today’s wages numbers. Wages growth has bottomed around 2% year-on-year, but there’s no suggestion of any up-tick as yet. Any increase was probably unlikely, given unemployment and underemployment have been relatively stable in recent times, and are still elevated.

This will leave the RBA comfortably on hold and waiting for some further reduction in unemployment, which the Bank expects to occur, but only gradually. The encouraging news is that leading indicators such as the NAB Business Survey and SEEK job ads suggest the demand for labour is strengthening.

Diana Mousina, AMP Capital

Wages growth has been declining since 2012-13 but has been stabilising over recent periods, although at a low level. While this latest wages data confirms that underlying wages growth is bottoming, there are very limited signs that wages will accelerate meaningfully from current levels in the near-term.

Wages can lift from here if spare capacity in the labour market declines. A good measure of spare capacity is underutilisation which is the combination of unemployment and underemployment. Currently, underutilisation is close to 14% in Australia compared to 8% in the US which explains why there are clearer signs of a pick up in US wages growth. Strong employment growth over the past year has lowered the unemployment rate, but further progress is required.

Recent Enterprise Bargaining Agreements outcomes also showed a small lift in agreed wages, but still well below agreements reached over the past few years which is another sign that wages growth will remain subdued over the near-term.

Callam Pickering, Indeed

The fate of the federal budget rests with the assumption that wage growth will rise sharply in the next couple of years. But so far there is no evidence that wage growth has improved.

It was another dour quarter for Australian households. Wages rose by just 0.5%, falling a touch shy of underlying inflation, which means that, on average, workers earned less in early 2018 than they did at the end of last year. The decline in real wages was larger again for workers in the private sector, which continues to experience softer wage growth than public sector workers.

The simply reality is that there remains a high degree of slack across the Australian labour market. Job seekers have little bargaining power and to some extent soft wage growth may have become ingrained in their expectations. We may not see a material improvement in wage growth until the unemployment rate dips below 5% and unfortunately policymakers don’t expect that to happen in the next three years.

Today’s result won’t change RBA thinking but it reinforces the challenges facing the Australian economy. It will take years for wage growth to return to the levels once considered normal and that suggests that inflation and the cash rate will remain low as well. Right now it is quite possible that we won’t see a rate rise before 2020.

Paul Dales, Capital Economics

With wage growth stuck in the mud at 2.1% in the first quarter and likely to stay there or thereabouts for a while yet, the prospect of an interest rate rise next year has diminished further. It also makes the fiscal projections the Treasurer published in the Budget last week look shakier.

Wage growth may edge up ever so slightly over the next couple of years as some of the spare capacity in the labour market is used up, and the unemployment rate glides down from 5.5%. But our view that the unemployment rate would need to decline to about 4.0% to signal that the labour market is in equilibrium means a strong cyclical rise in wage growth is not on the horizon.

Throw in the long-term structural forces of globalisation and technological innovation that are restraining wage growth in most economies, and it’s hard to see wage growth rising to 2.5% before 2020. That would be much lower than the Treasurer assumed in the Budget. It may also prevent CPI inflation from rising above 2.0% as quickly as the RBA expects.

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