Australian businesses may be more confident but that doesn't mean wages will rise

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Although Australian businesses are feeling more confident about the economy, better wage growth isn’t expected anytime soon.

The latest “wage gauge” index from ANZ economists David Plank and Giulia Lavinia Specchia shows that a pickup in business sentiment hasn’t been matched by wary households.

Last week’s wages data provided more sobering news for Australian workers, with annual wage growth for the March quarter coming in at 1.9%.

Although the figure was in line with forecasts, it was less than the recent 2.1% growth in inflation, which means that real wages went backwards for the first time since June 2014.

Also concerning is the fact that private sector wage growth was just 1.79% — the lowest growth on record.

With that in mind, the latest wage gauge provides a faint glimmer of hope for Australia’s workforce.

It ticked upwards in April after falling unexpectedly in March.

Combined with slow wage growth, it means that the lag between the latest wage price index and ANZ’s wage gauge is still readily apparent.

The fact that the wage gauge’s relatively strong level of correlation has recently diverged suggests one of two things: either wages are poised to rise slightly or sentiment will drive the wage gauge lower.

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.

Interestingly, the index got a boost in April from improved sentiment among businesses. According to Plank and Specchia, that means “Australian businesses seem to expect marginally higher wages going forward”.

It ties in with recent trends from NAB’s business confidence index, which hit the highest level in a decade two weeks ago.

Recent data shows a disconnect appearing between business confidence and consumer sentiment. Off-setting business confidence in the latest wage gauge was a fall in expectations for household finances.

Despite the gain in business confidence, Plank and Specchia said that commodity prices are still the only component of the index in positive territory.

“That said, after reaching a peak in January 2017, the contribution from the commodity price component has been steadily diminishing,” they said.

While there still aren’t many bright spots in the outlook for wages, Plank and Specchia said the latest gauge reading suggests that labour costs have bottomed out and may be due for a slight increase in 2017.

However, they stopped short of suggesting that a healthy pickup in wage growth would be forthcoming anytime soon.

“A strong acceleration in wages remains unlikely, however, given ongoing slack in the labour market (even after the recent decline in the unemployment rate), low inflation expectations and worker concerns about job security.”

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