Key leading indicators are showing conflicting signs for Australian wage growth

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Australian wage growth — or lack thereof — is a key talking point for markets ahead of the release of Q4 wage data next Wednesday (11:30am AEDT).

While yesterday’s employment report saw a continuation of Australia’s record run of jobs growth, it’s yet to translate into upward pressure on wages.

On the plus side, analysts from ANZ argue there’s reasonable evidence that the downward move in wage growth has at least bottomed out.

This chart shows how recent wage data — based on both the quarterly wage price index and average wages — has shown signs of stabilisation.

But even if wages are starting to move higher, the pace of improvement has been very gradual,” ANZ said.

“When this improvement might accelerate is a critical issue for the RBA, with Governor Philip Lowe on 8 February stating that, ‘a lift in wage growth is likely to be necessary for inflation to average around the midpoint of the 2-3 per cent medium-term inflation target’.”

In view of that, ANZ looked at key indicators to try and assess whether that gradual increase has any chance of picking up steam later in the year.

They highlighted a component NAB’s monthly business survey, which showed that the number of businesses reporting difficulties finding suitable labour increased in the second half of 2017.

“Historically, this has provided a strong leading signal about wages,” the analysts said.

The upward pressure is clearly shown in the chart below, which plots quarterly wage data against NAB’s the suitable-labour measure, mapped 12 months in advance:

But unfortunately for long-suffering Australian workers, ANZ added the caveat that “this time might be different”.

The Australian companies surveyed by NAB also expect inflationary pressures to remain muted, and that’s also been a good leading indicator — for downward pressure on wages.

This chart shows how the number of businesses who expect long-run inflation to remain below 3% remains near historic highs:

“If there is no expectation that inflation is set to rise then businesses may be reluctant to pay higher wages,” ANZ said.

The analysts added that if Australian business conditions remain at record highs, it could translate into improved overall productivity — which would help to put upward pressure on wages.

“The strong lift in non-mining business investment that is underway should be expected to boost productivity in time through capital deepening and thus eventually contribute to higher wages even if business price expectations remain low.”

However, they said the flow-on effect into higher wages from increased capex typically takes time.

In view of that, ANZ said wage growth is likely to remain low for the remainder of 2018, which will keep a lid on inflation and by extension, interest rates.

The bank now expects interest rates to stay on hold until the first half of 2019.

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