Aus Wages Growth Remains Low At 2.1% - Hard To See An Upswing On The Horizon

Originally published by AMP Capital

• June quarter wages growth (excluding bonuses) was 0.6% which was in line with market expectations and up a bit from 0.5% in the March quarter. This took annual growth up to 2.1% year on year from 2% in the March quarter (although that had been revised down from 2.1% previously reported).

• (While wages growth including bonuses accelerated to 2.6% year on year in the March quarter as a very weak increase a year ago dropped out, it fell back to 2.5% year on year on the June quarter and the quarterly rate of increase is also just 0.5%.)

• Private sector wages growth (excluding bonuses) is slightly lower than the total at 0.5% quarter on quarter or 2% year on year, so the public sector is continuing to see slightly faster wages growth.

• Wages growth is strongest in Victoria and Tasmania at 2.5% year on year and weakest in Western Australia and the Northern Territory at just 1.5% year on year. Wages growth is strongest in health (+2.7% yoy) and education (+2.5%) and weakest in mining (+1.3%) and retail (+1.5%).

The good news is that wages growth looks to have lifted from its 2016 low point of 1.9% year on year and anecdotal evidence points to some lift in wages growth in some parts of the economy. However, the lift in wages growth from 1.9% to now 2.1% owes largely to a faster increase in the minimum wage for 2017-18 of 3.3% which was up from 2.4% for the previous year. And from July 1 this year, the minimum wage has increased by a slightly faster 3.5%. But were it not for the acceleration in minimum wage increases wages growth would still be running at around 1.9% so there is little evidence of any pick up in underlying wages growth.

At 2.1% annual wage growth is just keeping up with headline inflation of just 2.1% too, so real wage growth is zero, providing no boost to real household spending power which will act as an ongoing drag on retail sales and consumer spending.

With unemployment and underemployment remaining very high at 13.9% its hard to see a significant acceleration in wages growth. With wages growth and inflation both remaining low it’s likely that expectations for inflation have fallen and this is helping entrench ongoing low wages growth which in turn is feeding back to low inflation. To get wages growth up to a more reasonable 4% probably requires labour market underutilisation to fall to around 10% at least.

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In other data released today, consumer confidence for August fell 2.3%, partly reversing a 3.9% gain in July. With the July NAB business survey showing a slight rise in business confidence maybe business and consumer confidence are starting to diverge again. At least consumer confidence is still a bit above its long term average and overall confidence levels in the economy are okay.

h2 Implications/h2

While its good to see wages growth up from its lows two years ago, we are yet to see a meaningful pick up. This is a drag for consumer spending and will help keep inflation stuck around the low end of the 2-3% inflation target.

As result we remain of the view that the RBA won’t start raising interest rates until 2020 at the earliest and given the housing related downturn there is still a significant chance that the next move could turn out to be a rate cut.

With the Fed hiking and the RBA on hold (or maybe even cutting at some point) the Australian dollar has more downside. At just above $US0.72 its now fallen back to its lowest level since early last year.

Written By: Shane Oliver