Slow wage growth, weak sentiment bolster low rates view

SYDNEY: Australian workers endured another quarter of feeble wage growth last quarter while consumer sentiment eased again in May, disappointing results that risk sapping economy-wide spending and restraining already-tepid inflation.

The local dollar slipped 0.4% to the day’s low at US$0.7447, as the wage report cemented views that the Reserve Bank of Australia (RBA) will hold rates at record lows for a prolonged period until it sees a revival in consumer prices.

Yesterday’s figures from the Australian Bureau of Statistics showed annual wage growth at 2.1% in the first quarter, similar to the fourth quarter rate, and only just above the all-time trough of 1.9%.

Wage growth has now stayed stuck around 2% since early 2016 and is half the rate workers enjoyed during the decade-long mining boom that began in the early 2000s.

Policymakers have blamed the persistently high labour market spare capacity for discouraging firms from boosting pay rates, even as jobs have surged over the past year.

Australia’s jobless rate has remained stubbornly stuck around 5.5% and levels of underemployment – those already working but wanting more hours – are near historical highs.

“We may not see a material improvement in wage growth until the unemployment rate dips below 5% and unfortunately policymakers don’t expect that to happen in the next three years,” said Callam Pickering, APAC Economist for global job site Indeed.

RBA’s latest forecasts show the jobless rate easing to 5.25% by mid2020, although core inflation is set to stay below the middle of its 2%-3% target band even by then. “Today’s result won’t change RBA thinking but it reinforces the challenges facing the Australian economy,” Pickering said.

The central bank last cut rates to a historical low of 1.5% in August 2016, notching up the longest period without a change in modern history. Financial markets are wagering the steady spell could last well into 2019.

On Tuesday, RBA deputy governor Guy Debelle said it may take a lower unemployment rate than currently expected to generate a sustained move higher in wage growth.

That outlook has dimmed the mood of Australians with a Melbourne Institute and Westpac Bank survey showing its index of consumer sentiment easing 0.6% in May as consumers remained cautious about their finances.

The deterioration came even as Australia’s centre-right government handed out a voter-friendly budget this month with a massive tax package for households.

Policymakers have repeatedly emphasised an acceleration in wages would be necessary to revive inflation, calling for workers to demand higher pay hikes.

RBA governor Philip Lowe recently told lawmakers that average wage annual increases need to be around 3.5% to achieve average inflation of 2.5%.

The last time wages grew as fast as 3.5% was in the third quarter of 2012.

In the private sector, the outcomes are even worse – annual wage growth is stuck near historic lows of 1.9% with not a single industry paying more than 2.8%. The strongest growth rates were in healthcare and education, with mining wages up just 1.4%.

The RBA itself is facing strife with unions at its note printing subsidiary who are calling for a 3.5% pay rise rather than 2% the central bank is offering.

“Even the Reserve Bank won’t give workers a pay rise willingly,” said Troy Gray, a secretary for the Electrical Trades Union, after months of negotiations over wage rise “hit a brick wall”. — Reuters