The Reserve Bank of Australia (RBA) has been surprised by the strength in Australian employment growth this year.
However, it’s still not sure whether it will be enough to boost household consumption, along with wage and inflationary pressures, in the period ahead.
That’s the key takeaway from the minutes of its November monetary policy meeting with the bank acknowledging that “there was considerable uncertainty around when and how quickly wage pressures might emerge and about how much these would add to inflationary pressure” despite recent strength in hiring.
In just one paragraph, the RBA summed up its current conundrum.
Strong employment growth in the preceding year had been met partly by an increase in labour force participation, but the unemployment rate had declined and was forecast to edge lower. Wage growth had remained low. It was expected to increase gradually over the forecast period as spare capacity in the labour market diminished and the dampening effects of compositional changes associated with the adjustment of the economy to the end of the mining investment boom abated. Members noted, however, that there was considerable uncertainty around when and how quickly wage pressures might emerge and about how much these would add to inflationary pressure. In particular, they noted that, among other factors, pressure on margins from strong competition and a faster-than-expected pick-up in productivity growth could delay the pass-through of tighter labour market conditions to inflationary pressure.
So on one hand, labour market conditions delivered a pleasant surprise. However, on the other, that failed to translate to a meaningful pickup in wage pressures as what would have normally been the case in the past.
“Although survey measures and the Bank’s liaison suggested firms were finding it more difficult to recruit some types of labour, various measures of growth in wages had not yet picked up and had been lower in preceding quarters than forecast a year earlier,” the bank said.
That point was reinforced by the release of Australia’s September quarter Wage price Index — released after the bank’s November monetary policy meeting — with hourly wage rates growing by a paltry 0.5% during the quarter, well below the 0.7% lift expected.
The bank acknowledged that in most advanced economies “growth in wages and hourly earnings had been low despite ongoing reductions in spare capacity”, adding it discussed the possibility that “globalisation and technology were leading wage growth to be less responsive to changes in the demand for labour”.
Somewhat ominously, it said that the disconnect between tighter labour market conditions and wage pressures “could continue for a while”.
Given persistent weakness in wage pressures, it also said there was now increased uncertainty on the outlook for both household consumption and inflationary pressures.
Here’s what the minutes said on the link between wage pressures and household consumption.
Retail sales had been weak in the September quarter, which was expected to translate into lower quarterly consumption growth than in the June quarter. Members noted that the outlook for consumption growth depended on the outlook for household income growth, which remained uncertain. They discussed the possibility that households might change their consumption and saving decisions if the period of low income growth persisted.
And, again linked to the weakness in wage pressures and retail sales, it also pointed to uncertainty on the outlook for inflationary pressures.
Members noted that the outlook for inflation would be influenced by the persistence of heightened competitive pressures, the outlook for wage growth and the speed with which wage costs might flow through to higher prices. They observed that competitive pressures had led food and other retailers to alter their business models in an effort to reduce their cost structures. These competitive pressures on both retail margins and costs were expected to continue for quite some time.
So to recap, weak wage growth, leading to tepid household income growth, could lead to softer household spending and ongoing disinflationary pressures in the retail sector.
It’s little wonder why the bank cut its inflation and GDP growth forecasts in its quarterly statement on monetary policy despite increased optimism on the outlook for non-mining business investment, labour market conditions and global economic conditions.
Throw in a recent slowdown in the Australian housing market, particularly in Sydney, and it only acts to intensify uncertainty on the outlook for the household sector, and with it the broader Australian economy given its sheer size.
Until that uncertainty is resolved, particularly when it comes to wage pressures, it’s unlikely the RBA will respond by adjusting interest rates in either direction for some time yet.
The minutes of the RBA’s November monetary policy meeting can be accessed here.