Australia: Wages and financial conditions to determine the stance of policy - Westpac

In view of Elliot Clarke, Research Analyst at Westpac, those expecting a lift in wages growth (such as the RBA) of Australia were again left disappointed as private wage growth failed to lift from historically low levels in the December quarter (0.5%,1.9%).

Key Quotes

“Total wage growth did round up to 0.6%, 2.1%yr, but this only occurred because of a 0.6% gain for the public sector. Even then, at 2.4%yr annual growth in public sector wages is still only 0.1ppt above the all-time low, recorded back in 2016. As inflation also printed at 1.9%yr in December, these results imply that real wages in the private sector were flat in 2017. Indeed, one could argue that, given the sharp rise in the cost of life’s essentials such as electricity and health in recent years, many may be feeling as though their living standard is declining. It is important to recognise that the pace of wage gains is weaker than the level that generally corresponds to the level of unemployment and underemployment. Slack in the labour market is pervasive and is restricting wage inflation across the nation. By state, Victoria has the highest wage inflation at 2.4%yr; the NT is the weakest jurisdiction at 1.1%yr. A modest drift higher in wage inflation is likely in 2018, but there is no foundation for a material acceleration.”

“While the RBA’s January meeting minutes were a little more positive on the consumer – after a modest rebound in retail sales through Q4 –  the Board highlighted that “there was still a risk that growth in consumption might turn out to be weaker than forecast if household income growth were to increase by less than expected”. The December quarter wage outcome certainly gives weight to this concern. The current downtrend in house price growth is another risk to the downside, albeit only if the downtrend extends materially from here. As per other recent RBA communications, there is no indication of any urgency to tighten policy. The RBA will look for 2019 to be a live year for policy. However, we remain of the view that they will be on hold in 2019 as in 2018.”