A major factor that has prevented the RBA from hiking rates looks to be turning the corner

Isaac Lawrence/ AFP/ Getty ImagesDrivers take a corner during the Formula E motor racing championship in Hong Kong.
  • Despite low unemployment and above-trend economic growth, inflationary pressures remain close to non-exist in Australia, growing at less than 2% in the year to September.
  • It’s an unusual mix, but one that can be explained by ongoing weakness in wage pressures.
  • ANZ Bank is forecasting that hourly wages will grow by 2.4% in the year to September, the fastest pace in four years.
  • The RBA has previously stated that annual wage growth of around 3.5% will be required to keep inflation steady at the midpoint of its inflation target. They grew by just 2.1% in the year to June.

Australia’s economy is growing an at annual pace of more than 3%, a trend that’s expected to continue into 2019, and perhaps 2020, according to the Reserve Bank of Australia (RBA). Unemployment also sits at just 5%, the lowest level in six years.

However, despite low unemployment and above-trend economic growth, inflationary pressures remain close to non-exist, growing at less than 2% in the year to September, be it headline or in underlying terms.

It’s an unusual mix.

Strong GDP growth and low unemployment should both be helping to boost inflation. However, it isn’t, at least not yet.

The missing ingredient is wage growth, something that still doesn’t receive anywhere near the attention it should in Australia in 2018.

Despite unemployment continuing to decline and faster economic growth, hourly wages, as measured by the ABS Wage Price Index, grew by just 2.1% in the year to June, a factor that has undoubtedly contributed to recent weak inflation outcomes.

According to RBA Governor Philip Lowe, annual wage growth in the vicinity of 3.5%, accompanied by a modest improvement in labour productivity, will likely be required to keep underlying inflation at 2.5%, the midpoint of its target.

Clearly, we’re a long way from that level yet, partially reflecting that despite a sharp decline in unemployment, broader measures of labour market underutilisation are still elevated compared to prior norms.

There’s still a large proportion of workers who are either employed or who have a job but would like to work more hours.

That’s helping to keep a lid on wage pressures, keeping inflation low and the RBA on the sideline.

While many suspect the low wage growth, low inflation era will continue for some time yet, not everyone shares that view.

Economists at ANZ Bank, for instance, believe workers, and the RBA, are about to receive some pleasing news on wages as early as next week.

“The next installment of wage data comes on November 14 with the release of the Q3 Wage Price Index,” says Felicity Emmett, Senior Economist at ANZ.

“We are looking for a quarterly increase of 0.7% which will see annual growth lift to 2.4%, the highest in four years.”

ANZ Bank

A four year high.

Not bad, especially with inflation running at just 1.9% over the same period, meaning real hourly wage growth will sit around 0.5% over the past year should Emmett be correct.

Along with tighter labour market conditions, Emmett says there’s a number of factors that look set to give wage growth the hurry up.

“We should see the impact of the 3.5% minimum wage rise, which came into effect on 1 July,” she says.

“Our calculations suggest that the larger than usual rise in the minimum wage will add around 0.15 percentage points to the WPI in the quarter.”

However, despite a large increase in Australia’s minimum wage rate a year earlier, that didn’t result in an acceleration in wage pressures as many expected, creating dome doubt as to whether a similar scenario may be seen again on this occasion.

However, Emmett says this time will be different.

“Last year this impact was offset by other factors, including the delay of a number of large retail enterprise bargaining agreements,” she says.

“The delay to a number of EBAs last year weighed on the overall WPI, effectively muting the impact of the minimum wage rise. This year, we do not expect to see a repeat of that, with some large retail EBAs coming into effect in the quarter.”

Emmett says these agreements have included quite solid “catch-up” wage rises that should help support wage growth, particularly in the retail sector, the second-largest employer nationwide behind healthcare.

So workers have something to look forward to as the combination of low unemployment, new EBAs and minimum wage increases help to spur on wages, a welcome development given years of real wages being flat to lower.

However, for those workers looking for a return to the halcyon days of average wages growing at 4% or more per annum, Emmett says be prepared for disappointment, at least in the short-to-medium term.

“While the unemployment rate has fallen to a six-year low, and underemployment has edged lower, total labour market underutilisation remains above where it was through the whole of last decade,” she says.

“In our view, more substantial falls in both underemployment and unemployment will be required before material wage pressures emerge.”

So no quick return to big wage pressures, nor the likelihood of a near-term rate hike from the RBA, should Emmett be on the money.

However, the RBA expects the economy will grow at 3.5% both this year and next, an outcome it believes will push unemployment below 5%, helping to boost wage pressures.

Should it be right, and that’s still a big “if” in many people’s opinion, such an outcome will likely help boost inflation, paving the way for it to lift interest rates for the first time since late 2010.

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