Sluggish Wage Growth in Dec’19 Quarter Raises Expectations of Another Rate Cut

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 Sluggish Wage Growth in Dec’19 Quarter Raises Expectations of Another Rate Cut
                                 

Australian labour market seemed to be in a state of bliss after ABS reported an unanticipated fall in the Dec’19 unemployment rate last month; however, the recent wage growth statistics reveal the market is still under high pressure.

The Wage Price Index (WPI) grew sluggishly; 0.5 per cent in December quarter 2019 and 2.2 per cent over 2019 in seasonally adjusted terms. The highest and lowest quarterly rise was seen in the Northern Territory and the Australian Capital Territory of 0.9 per cent and 0.2 per cent, respectively.

The data indicate that the wage growth has again failed to pick up, experiencing an extended period of moderate growth during 2019.

As per the ABS Chief Economist, Mr Bruce Hockman, the seasonally adjusted Dec’19 quarter rise was influenced by the comparative stability of the labour underutilisation rate.

It can be seen from the above graph that the wage growth remained subdued over the entire year, except June 2019 quarter, when it increased slightly better by 0.6 per cent.

Inside Look at WPI Dec’19 Quarter Data

During the Dec’19 quarter, the seasonally adjusted private sector wages and public sector wages rose by 0.5 per cent and 0.4 per cent, respectively.

As per the ABS, the private sector wage growth surpassed the public sector wage growth for the first time since 2012.

Moreover, over the year, the public and private sector wages increased by 2.2 per cent each, which represents the lowest public sector growth rate since the beginning of index in 1997 December quarter.

The state-wise data demonstrated that Victoria and New South Wales were the key contributors to wage growth, with Victoria observing the highest annual growth of 2.7 per cent.

On the other hand, Western Australia saw the lowest wage growth of 1.7 per cent throughout the year. It is worth pointing out that Western Australia WPI has stayed under 2 per cent since June quarter 2016.

The ABS also announced the following industry-wise statistics on wage growth:

  • Highest quarterly rise of 0.9 per cent was recorded by financial and insurance services industry.
  • Other services, and accommodation and food services saw the lowest quarterly rise of 0.2 per cent.
  • Health care and social assistance observed the maximum yearly growth of 3.1 per cent, while information, media and telecommunications saw the lowest yearly growth of 1.6 per cent.

Interest Rate Cuts Failed to Lift Wage Growth

Market experts are of the opinion that the three interest rate cuts announced by the RBA last year have failed to lift wage growth, indicating that the central bank’s efforts to improve incomes are struggling.

ALSO READ: RBA Keeps Interest Rate Unchanged at 0.75%, Decision Largely in line with Market Expectations

The slower-than-expected increase in wages has been weighing on the household consumption for the last several quarters, with people utilizing the benefits of interest rate cuts to pay off debts rather than spending.

Moreover, the latest wage growth figures reflect the early signs of the effect of coronavirus outbreak and bushfires, with wages in the accommodation and food services industry recording the lowest quarterly increase of 0.2 per cent.

Experts expect the wage growth to remain subdued in the coming months, anticipating the central bank to reduce the cash rate again in order to stimulate economic growth and accelerate wages growth.

Wage Growth to Remain Unchanged Over 2021, Says RBA

As per the RBA, the growth in wages during September 2019 quarter has been broadly in line with its expectations. The central bank expects a small change in wage growth over 2021 and believes any gradual lift in the wage growth to be a welcome development for the Australian economy.

The RBA has released the following forecasts for wage growth in its last economic outlook:

The RBA’s projections stand on the ground that any upward pressure on wage growth would be offset by a downward pressure from the rise in superannuation guarantee from mid-2021. The super guarantee requires the Australian employers to contribute a certain percentage of employee’s earnings to a complying super fund.

The Morrison government is all set to raise the compulsory superannuation guarantee from 9.5 per cent to 12 per cent in five annual increases, beginning from July’21. The increase would be gradually phased in with a 0.5 per cent increase every year from July 2021.

As per the RBA, the potential rise in superannuation guarantee could constrain wages growth for some wage earners; however, the extent and timing of this remains uncertain. The central bank is of the opinion that if the rise in super guarantee is not completely offset by the lower growth in wages, total labour costs would soar for employers.

However, the recent RBA forecasts relies on the expectation that a rise in guarantee would largely offset the lift to wage growth from the gradual drop in spare capacity of the labour market.

ALSO READ: Job Ads Fall to Nearly 4-Year Low Amidst Rising Job Vacancies

Employment Growth to Drive Labour Income Growth in 2021

The RBA expects a pick-up in employment growth to drive labour income growth in 2021, anticipating a fall in the unemployment rate to 4.75 per cent over 2021.

The central bank has revised down the projections for employment growth for the first half of 2020 in the wake of the downward revision to GDP growth in the near term. However, the bank anticipates a pick-up in employment growth as soon as the GDP growth improves.

Moreover, the unemployment rate is likely to remain in the range of 5 to 5.25 per cent for some time, declining over 2021.

Below are the RBA’s recent projections reflecting percentage change over the year to quarter shown:

Amidst the existing economic scenario, the RBA has kept the option for further interest rate cut open in its latest Monetary Policy meeting, in spite of concerns that it might increase house prices further and affect savings. The coronavirus outbreak is weighing on central bank’s anticipations about the nation’s economy, inducing financial markets to expect another rate cut by second half of the year.

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