Australia | Nov 12 2008
By Chris Shaw
With the Reserve Bank of Australia (RBA) now focusing on stimulating growth in the Australian economy there have been concerns over the potential for income pressures to impact on the inflation outlook, but these have been allayed to some extent by the latest wage data released today.
The Wage Price Index for the September quarter recorded a rise of 0.9%, slightly below the market’s consensus forecast of an increase of 1.0%. The data equate to an annual increase of 4.1%. According to ANZ economist Riki Polygenis, the fact the increase for the quarter is down from the 1.2% increase recorded in the June quarter is a positive, as it implies wage costs in Australia won’t add to inflationary pressures in the near-term.
As Commonwealth Bank senior economist Michael Workman notes, there has been some wage pressure in that almost 30% of the workforce is getting what the RBA would view as a large increase of more than 4.5% and nearly 40% have enjoyed increases of 4.0-4.5%. This is thanks largely to the resources boom, while there have been some other factors keeping pressures at bay overall. These include additional labour supply from immigration, especially the case in more specialised areas, along with greater participation rates in the labour market overall and tax cuts acting as effective wage increases by lifting disposable income rates.
Overall, Workman suggests today’s data show the long-feared wages breakout now appears unlikely given the wage component of most business surveys remains at comfortable levels. TD Securities senior strategist Joshua Williamson agrees, suggesting while the quarterly changes in the index are small, they confirm the pace of wages growth is moderating.
This trend should continue, in his view, as Williamson notes in the brief slowdown of 2000/01 wage growth fell by 0.5% from its peak. Given this downturn is expected to last longer, wages growth should moderate by at least this much this time around.
This won’t help the economy so much though, in his view, as Williamson suggests an easing in nominal wages growth as well as the need for households to rebalance after several years debt based increases in expenditure, is likely to keep demand and therefore economic growth at moderate levels.
With little further economic data due before the RBA next meets in December, TD Securities continues to forecast a further 50-basis point cut in official interest rates at that time. Although, Williamson accepts with there being no sign of any bottoming in economic conditions globally, the risk of a 0.75% cut in official interest rates is increasing.
Westpac has turned increasingly positive on the potential for further rate cuts, with global head of economics Bill Evans making the point today the “neutral” rate for the RBA is no longer the 5.0% the bank had previously estimates, but is now around 4.5% or lower.
With there being a pressing need for rates to be reduced to a lower than “neutral” level to offset economic weakness, a target of 3.5% is reasonable, leading Evans to suggest the RBA may well cut rates by 0.75% at the December meeting.