Australia: Some signs of steady progress in Wage Price Index (Q4) – Capital Economics

According to Paul Dales, Chief Australia & New Zealand Economist at Capital Economics, the rise in wage growth in the fourth quarter may be the first real sign that wages are benefiting from the recent strength of jobs growth for Australian economy.

Key Quotes

“But real wages have been stagnant for two years. And the excess supply of labour and long-term structural forces will prevent wage growth from rising rapidly.”

“The 0.6% q/q rise in the wage price index pushed up the annual growth rate from 2.0% to 2.1% (the consensus forecast was 2.0%). That’s the second increase in annual wage growth in a row. But while the rise from 1.9% in the second quarter to 2.0% in the third was largely due to the bigger-than-usual rise in the minimum wage on 1st July, the rise in the fourth quarter may be due to the improving labour market.”

“Admittedly, wage growth in both the private (1.9%) and public sectors (2.4%) was unchanged. But that’s just due to rounding. More importantly, wage growth rose in the sectors and states where activity is improving most. It rose from 1.2% in the third quarter to 1.4% in the fourth in the mining sector, from 1.8% to 1.9% in the construction sector and from 1.5% to 1.8% in professional business services. It also rose from 1.3% to 1.5% in Western Australia and from 2.2% to 2.4% in Victoria, although it fell from 2.1% to 2.0% in New South Wales.”

“But it’s not time to break out the champagne and conclude that the era of very low wage growth is over as there are a few reasons why wage growth will only edge up gradually, perhaps to 2.3% by the end of this year and to 2.5% next year. First, it will take another couple of years of decent jobs growth to absorb all the excess supply in the labour market. Second, the recent slump in the rates built into enterprise bargaining agreements will restrain wage growth as these agreements tend to last for a couple of years. Finally, the long-term forces of globalisation and technological innovation that have restrained wage growth everywhere are unlikely to fade soon.”

“So wage growth is unlikely to significantly boost income growth or underlying inflation this year at least. Indeed, once you strip out inflation, which is currently 2.0%, real wages haven’t risen for two years. The RBA would need to see more evidence that wage growth is rising before it raises interest rates. Our view is that won’t happen until the second half of next year.”