Of all the upcoming Australian economic data, none will be as important as the December quarter Wage Price Index (WPI) released on February 21.
Forget next Thursday’s employment report — it’s the wage data that carries the greater potential to shift the dial on the outlook for Australian interest rates.
That point was made clear on Thursday with RBA Governor Philip Lowe telling the A50 Australian Economic Forum dinner in Sydney that “a lift in wage growth is likely to be necessary for inflation to average around the midpoint of the 2–3% medium-term inflation target.”
That’s a huge caveat attached to the RBA’s view that inflationary pressures will build gradually in the period ahead, all but ensuring that there’ll be an large amount of focus on the WPI report.
Will there be a gradual lift in wage pressures, providing further confidence that the deceleration in wage growth has bottomed? Or will we receive another shockingly-low outcome as was seen in the September quarter report, showing no real signs of acceleration despite an unusually large lift the minimum wage rate at the start of July?
No one is really certain, including the RBA.
While the bank sees wage pressures gradually building over the next couple of years, as pointed out by Sally Auld, Chief Economist and Head of Australia and New Zealand Fixed Income and FX Strategy at JP Morgan, its commentary on wages in its quarterly Statement on Monetary Policy (SoMP) released yesterday wasn’t overly reassuring.
“The detailed commentary on wages in the SoMP doesn’t contain much that is positive,” she said, pointing to just some of the downbeat commentary from the RBA below.
“…There have been broad-based declines in wage growth outcomes for the majority of workers who have remained with the same employer in recent years”; “…The gap between the lower wages of those entering into employment and those already working has widened”; “…The share of workers changing employers has been at a low level in recent years and the boost to earnings from changing jobs has declined since the mining boom”; “…New enterprise bargaining agreements are tending to incorporate smaller wage rises than the agreements they replace”; “…Growth in average earnings from the national accounts (AENA) remains subdued and noticeably weaker than growth in the WPI”; Despite strength in construction (activity and employment), “…there is little evidence of broadening wage pressures across the construction sector” and “…The weakness in average earnings was particularly pronounced in goods-related industries such as construction.”
Not overly convincing, right?
Further to those remarks, Auld notes the RBA’s own economic forecasts don’t point to any meaningful pickup in wage pressures in the years ahead, at least based on its expectations for unemployment.
“The forecasts assume some spare capacity remains in the labour market at the end of the forecast horizon,” she says, referring to unemployment being expected to remain above 5%, slightly above what many regard as being Australia’s full employment level.
“It should also give investors reason to question whether wages growth will pick up meaningfully enough to shift core inflation onto a more target-consistent trajectory.”
Indeed, even the RBA pointed to heightened uncertainty as to whether wage pressures will build as unemployment continues to fall, noting that “it is unclear how much any decline in spare capacity will translate into building wage pressures”.
To Auld, given that uncertainty, it means that wage data will play a prominent role in determining what happens next with interest rates.
“Recent data has come in around the RBA’s expectations, so there is little reason for the Bank to deviate from the current ‘perma-hold’ strategy on rates, nor to change its economic forecasts,” she says.
“Much will be determined by the path of wages, and so until anything changes on this front, the status quo on policy will persist for some time yet.”