Reserve Bank Governor Philip Lowe has finally achieved the faster wage growth he’s worked so hard to attain over the past six years, amidst an economy that’s weathering its hottest inflation in three decades.
In the three months to September, wages lifted 1% from the previous quarter – the fastest pace since early 2012, for an annual gain of 3.1%, government data showed. Both readings outstripped estimates and forecasts for an RBA hike in December that would take the central bank’s tightening to three percentage points in eight months.
Felicity Emmett, senior economist at ANZ, told Bloomberg that while they “don’t think this figure will alarm the RBA, it is a large step up,” and that “it’s therefore unlikely the RBA will pause in December; so, absent an exceptionally weak October employment report … we continue to think they’ll raise the cash rate by 25 basis points.”
In today’s environment of fast-rising prices, the current level of wage growth is still relatively restrained when compared with the Washington and Wellington economies. Also according to the central bank, wage gains remain consistent with inflation returning to its 2-3% target from a forecast peak of 8% this year.
In the minutes of its Nov. 1 policy meeting, RBA reiterated the need to avoid “a price-wage spiral” – this despite its central case that wages growth will remain moderate. It said it will keep an eye on the evolution of price-setting at firms and labour costs.
Economists said a return of migration back to pre-pandemic levels in Australia would likely cap wages growth.
“The third quarter acceleration in Australia’s pay growth is unlikely to threaten a wage-price spiral,” said economist James McIntyre. “At 3.1%, the year-on-year gains only just reached the lower end of the 3-4% per annum pace required to achieve the RBA’s inflation goals.”
Australia’s jobless rate is close to a 50-year low, which underlines the tight labour market underpinning wage growth.
Jobs data to be released today is expected to show a 15,000 rise in employment in October and unemployment to stay unchanged at 3.5% – outcomes that would signal ongoing firmness in the market and the possibility of wage gains continuing to strengthen, Bloomberg reported.
“The quarterly increase today annualizes to around 4% which is a little above the optimal level for wages growth to settle,” said Gareth Aird, head of Australia economics at Commonwealth Bank of Australia. “On our forecast profile unemployment will gradually rise over 2023. As that occurs it will be tougher for workers to push for bigger increases in salary, particularly as labor supply rises with the return of foreign workers.”
For the RBA, the risk of large rate hikes hitting the housing market and indebted markets was greater than the danger of speeding up wages fuelling inflation. The central bank is also welcoming bigger pay rises in the short-term following years of meager pay hikes.
It was for this reason that Lowe decided to downshift to quarter percentage-point rate hikes, with officials also starting to call attention to the potential for a pause. The key rate was lifted to 2.85% this month from a record-low 0.1% in May when the cycle began
The RBA also needs to pay attention to the moves by the new Labor government. Prime Minister Anthony Albanese has been taking some heat as real wages drop.
Salaries may also receive structural support from government legislation, prior to the Parliament stepping in to push for an expansion of multi-employer bargaining.
“Context is very important when analysing today’s wages publication,” Aird said.
The CBA economist highlighted some key events impacting the third quarter data, including the big rise in the Annual Wage Review of between 4.6% and 5.2% by the Fair Work Commission, the increasing inflow of migrants and foreign workers from a suppressed level, and RBA’s rapid and aggressive rate hikes that are yet to impact spending and by extension the demand for labor.
“In short, it was the ideal time for a worker to get a pay rise,” Aird told Bloomberg.
