The competing forces in the Australian economy were made starkly apparent with the release of the Reserve Bank of Australia’s (RBA) minutes from its March meeting this week.
The bank kept rates on hold at 1.5%, as expected, and also took on a more dovish tone as it monitors the Australian economic landscape.
Rapidly rising house prices and high household debt are juxtaposed against slow wages growth, low inflation and underemployment levels which remain stubbornly high (underemployment measures those who have a job but would like to work more hours).
Against that backdrop, the latest “Wage Gauge” report from economists at ANZ is unlikely to provide much comfort to those hoping for a quick turnaround in wages growth.
The gauge is “a survey-based measure of wage costs in Australia” and in the bank’s estimation, provides a useful guide for the future movement in unit labour costs that form part of Australian GDP.
Unit labour costs are a measure of staffing costs for firms, taking into consideration both wages and hours worked.
The gauge is comprised of three components – household surveys (income and job security questions), business surveys (labour costs and price indices) and a prices component (RBA index of commodity prices and the ANZ-Roy Morgan Australian Consumer Confidence Survey.
As shown here, the ANZ’s gauge ticked lower in March after steadily rising over the course of the previous year:
The figures did have a bit of a silver lining – ANZ economists Giulia Specchia and David Plank said that the decrease was “largely driven by some moderation in the price component and, specifically, commodity prices”. At least the household and business surveys – more closely tied to wages growth than the price component – didn’t report a downturn.
“Both the households’ and the firms’ components remained broadly unchanged – at below trend levels”, Specchia and Plank said. Not great news for those looking for a sign that wages are growing and inflation is on the rise.
The economists concluded that the latest Wage Gauge indicates that unit labour costs have stabilised and are unlikely to drop significantly. However, annual future wage growth is likely to be gradual.
Adding to the view that the Australian economy is facing growth headwinds in 2017, the RBA said in its minutes this week that forecast inflation wasn’t expected to reach the bottom end of the bank’s stated goal of 2-3% until the middle of next year.
ANZ’s measure of wages against services inflation is displayed in the chart below. It shows that despite the slight downturn in the March Wage Gauge, forward-looking wages are still expected to lead services inflation higher over the next 12 months (albeit off a very low base).
Specchia and Plank said: “domestic market services inflation has bottomed and may pick up somewhat in 2017. Again, however, any recovery will only be gradual”.