- Annual wage growth in Australia hit a two-year high in the final quarter of 2017
- Most economists don’t expect a strong pickup in wages in the quarters ahead, likely keeping interest rate hikes from the RBA off the table for the moment
- TD Securities, one of the most hawkish RBA forecasters, has abandoned its call for the RBA to lift interest rates in May
Australian wage growth looks like its turned the corner after years of constant declines.
According to data released by the Australian Bureau of Statistics (ABS), hourly wage rates grew by 0.55% in the December quarter last year, leaving the annual increase at a two-year high of 2.08%.
Markets had been expecting a quarterly gain of 0.5%, and 2.0% increase over the year.
As seen in the chart below, it now appears like wage growth has bottomed, at least in the current cycle, fitting with the view from the Reserve Bank of Australia (RBA) that wage pressures will gradually increase.
However, while wage growth is now starting to pick up, it still remains well below the levels seen in the past. And even with the recent rebound, wage growth in the private sector — the largest employer in Australia — is barely keeping up with inflation.
With the unemployment rate sitting at 5.5%, and labour market underutilisation significantly higher than that, it’s unlikely that wage growth will rebound spectacularly given an abundance of available workers.
Some believe that unemployment will need to fall to around 5% before wage and inflationary pressures truly lift, and even then no one can say with any certainty that they will given the experience of other nations like the US, UK and Japan where wages are still growing incredibly slowly despite extremely tight labour market conditions.
Now that the dust has settled following the release of the wage report, it’s time to see what Australia’s economic community have made of it all.
Are wages going to remain stuck in the mud, or do brighter times lie ahead.
Let’s find out, starting with Tom Kennedy, Economist at JP Morgan, whose report carried the slightly ominous headline of “Australia: Low wages for ages”.
Tom Kennedy, JP Morgan
Today’s slight upside surprise came through the public sector, where wages rose 0.62% over the quarter, outpacing the once again underwhelming private side print of 0.48%.
Wages pressures across the bellwether sectors of the economy are still largely absent. In particular, the retail and real estate sectors are both experiencing growth of just 1.6% year-on-year, while construction wages printed below the national average at 1.9% year-on-year. The exception is manufacturing, where wages have firmed in the past few quarters and are now running at 2.3% year-on-year.
While wage pressures are starting to emerge across various developed economies, most notably the US, we believe it is premature to expect such a scenario to play out in Australia. Indeed, the unemployment rate remains comfortably above 5% — the common estimate of NAIRU — and underemployment is still close to all-time highs.
Both of these measures indicate excess capacity across the labour market and, all else equal, suggest wage growth will remain unimpressive for some time yet.
Kristina Clifton, Commonwealth Bank
It looks like the much awaited pick up in wage growth may finally be here after mostly sub-0.5% quarterly outcomes since late 2015. This makes sense given the strong run of jobs growth over the past year or so and the easing in the unemployment and underemployment rates.
What really matters for household balance sheets is real wages growth. Real wages growth is only just in positive territory. Essentially flat real wages growth and high household debt levels are a difficult combination for consumers to navigate.
Looking ahead the turnaround in wages growth is likely to be gradual. Slack in the labour market is falling thanks to very strong employment growth in 2017. If solid employment growth continues there will be upward pressure on wages. However the overall increase in wages growth in is likely to be contained by slower wages growth for those on enterprise bargaining agreements (EBAs). Average annual wage increases for new EBAs have declined over the past year. EBAs tend to run for three years so wages growth for those on EBAs will slow as current agreements are replaced with new agreements that have lower wage increases.
It’s early days though and annual wages growth is well below the 3.5% rate that the RBA has defined as “normal”. This reinforces our view that the RBA will be in no hurry to raise interest rates. We have a rate hike pencilled in for Melbourne Cup day in November.
Felicity Emmett, ANZ Bank
Wage growth finally looks to be picking up with the WPI… [providing] the first upward surprise since Q4 2013.
Looking ahead, we expect to see another solid outcome in Q1. The finalisation of a number of delayed enterprise bargaining agreements late last year suggests some upside risks for both retail and overall private sector wages in Q1. More broadly, spare capacity in the labour market is gradually being eroded, job security has improved and businesses are reporting some pockets of difficulty in finding suitable labour. Together these factors suggest ongoing gradual improvement in wage growth.
The RBA is likely to be comfortable with the data, although we expect that, like us, it would be hoping for some improvement in private wage growth in Q1. RBA Governor, Philip Lowe, in his semi-annual testimony to parliament on 16 February noted, “If we’re going to deliver average inflation of 2.5% we should probably have average wage increases over long periods of time at 3.5%”. Wage growth is still a long way away from 3.5%, but it now looks to be convincingly heading in the right direction.
Callam Pickering, Indeed
Wage growth remains the key for the Australian economy. It’s the key for monetary policy, inflation and improved retail spending. Stronger business conditions and lower unemployment should, in time, lead to higher wage growth. Some firms are also reporting greater difficulty in finding staff, which points to tighter labour market conditions in some industries.
Nevertheless, economy-wide there remains a high degree of slack in the labour market. Any improvement in wage growth will be gradual and it could take a number of years before wage growth gets back to 3 per cent. Anyone hoping for a wage breakout will unfortunately be disappointed.
In the current environment, low wage growth continues to point towards weak inflation and makes it difficult for the Reserve Bank to justify higher interest rates. Until wage growth improves, the RBA will be more than happy to leaves rates unchanged.
Shane Oliver, AMP Capital
Underlying wages growth may be bottoming, but its premature to conclude that its starting to lift as the stronger than expected December quarter gain likely reflects a continuing flow through of last year’s minimum wage rise which appeared to impact less than expected in the September quarter.
Adjusting for the minimum wage rise leaves underlying wages growth still stuck around its low of just 1.9% year on year, and the acceleration in quarterly wages growth was only driven by the public sector with private wages growth stuck at 0.5% quarter-on-quarter.
Meanwhile, wage increases in new enterprise bargaining agreements have been tending to be lower also suggesting there has been no real lift in underlying wages growth and spare capacity in the labour market remains very high. So our view remains that its premature to conclude that the long awaited lift in wages growth is upon us.
We see no reason for the RBA to change its conclusion that the lift in inflation towards target will be gradual and we continue to expect that the RBA won’t be raising rates until late this year at the earliest.
Kaixin Owyong, National Australia Bank
The RBA has been looking for wages to pick up as a signal that the labour market has reached capacity. There isn’t much sign of a pick up, but it looks like wages have bottomed, consistent with the RBA’s expectations of ‘gradual’ increases to wages growth, and improvements to consumption and inflation. While some of the leading indicators suggest that the labour market is tightening, the RBA seems to be playing safe and will want to see some clearer signs of improvement before starting to remove accommodation.
Paul Dales, Capital Economics
It’s not time to break out the champagne and conclude that the era of very low wage growth is over as there are a few reasons why wage growth will only edge up gradually, perhaps to 2.3% by the end of this year and to 2.5% next year.
First, it will take another couple of years of decent jobs growth to absorb all the excess supply in the labour market. Second, the recent slump in the rates built into enterprise bargaining agreements will restrain wage growth as these agreements tend to last for a couple of years. Finally, the long-term forces of globalisation and technological innovation that have restrained wage growth everywhere are unlikely to fade soon.
So wage growth is unlikely to significantly boost income growth or underlying inflation this year at least. Indeed, once you strip out inflation, which is currently 2.0%, real wages haven’t risen for two years. The RBA would need to see more evidence that wage growth is rising before it raises interest rates. Our view is that won’t happen until the second half of next year.
George Tharenou, UBS
Q4 wages ticked up but remain relatively weak at 2.1% year-on-year despite booming 3% plus jobs growth. [And it’s] still far below the 3.5% the RBA Governor Lowe indicated is consistent with their 2.5% CPI target.
We have long argued that while wages have troughed, the pick up ahead will disappoint the hawks, especially given the collapse of wage rates in enterprise bargaining agreements which the RBA is starting to focus on as a drag ahead.
We continue to argue that the RBA won’t hike until CPI follows stronger growth, and we still see the cash rate on hold until Q1-2019.
Annette Beacher, TD Securities
As we have been signaling since the Dec quarter CPI report, we have updated our RBA call in the wake of today’s wage report.
While wages growth did not disappoint, the sluggish pickup combined with lower-than-we-expected underlying inflation and a patient RBA has spurred us to drop our long-held May hike, but leave in place our November +25 basis point hike for a year-end cash rate of 1.75%.
Sarah Hunter, BIS Oxford Economics
The data confirms that we’re a fair way off seeing inflationary pressures in the economy. Despite very strong employment growth last year there is still spare capacity in the labour market, which together with the longer term structural drags such as globalisation and falling rates of unionisation is keeping a lid on wage growth.
Even if employment growth remains robust it will take time for pressure to build up in the economy. Wages growth is unlikely to significantly outpace price inflation this year, and with no reason to hike this will keep the RBA on hold until 2019.