(Bloomberg) -- Australia’s central bank chief Philip Lowe finally achieved the faster wage growth he’s spent much of his six years at the helm seeking in an economy weathering its hottest inflation in three decades.
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Wages climbed 1% in the three months through September from the prior quarter, the fastest pace since early 2012, for an annual gain of 3.1%, government data showed Wednesday. Both readings outpaced estimates and cemented bets for another interest-rate rise in December that would bring the Reserve Bank’s tightening to 3 percentage points in eight months.
“While we don’t think this figure will alarm the RBA, it is a large step up,” said Felicity Emmett, a senior economists at Australia & New Zealand Banking Group Ltd. “It’s therefore unlikely the RBA will pause in December; so, absent an exceptionally weak October employment report tomorrow, we continue to think they’ll raise the cash rate by 25 basis points.”
In the current environment of rapid price gains, the current level of wage growth is still relatively contained compared with economies from Washington to Wellington. The RBA has also said wage gains remain consistent with a return of inflation to its 2-3% target from a forecast peak of 8% this year.
Despite its central case that wages growth will remain moderate, the RBA reiterated the need to avoid “a price-wage spiral” in minutes of its Nov. 1 policy meeting released Tuesday. The bank said it will pay close attention to the evolution of price-setting at firms and labor costs.
In Australia, a return of migration back to pre-pandemic levels could potentially cap wages growth, economists say.
What Bloomberg Economics Says...
“The third quarter acceleration in Australia’s pay growth is unlikely to threaten a wage-price spiral. 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”
-- James McIntyre, Economist.
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Australia’s jobless rate is hovering near a 50-year low, highlighting the tight labor market underpinning wage growth.
Jobs data out Thursday is forecast to show employment rose by 15,000 in October and unemployment held at 3.5%, outcomes that would point to ongoing firmness in the market and the possibility of wage gains continuing to strengthen.
“The quarterly increase today annualizes to around 4% which is a little above the optimal level for wages growth to settle,” said Gareth Aird 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 its part, the RBA sees the risk to the economy from large rate hikes hitting the housing market and indebted households as greater than the danger of accelerating wages fueling inflation. The bank is also welcoming bigger pay rises in the short-term after so many years of scant increases.
That’s why Lowe has opted to downshift to quarter percentage-point rate increases and officials have started highlighting potential for a pause. The key rate was raised to 2.85% this month from a record-low 0.1% in May when the cycle began.
Moves by the new Labor government are another factor the RBA needs to keep an eye on. Prime Minister Anthony Albanese has been taking some heat as real wages fall.
Salaries may also get structural support from government legislation currently before parliament that would allow the industrial umpire to step in when talks between workers and firms break down, and push for an expansion of multi-employer bargaining.
“Context is very important when analysing today’s wages publication,” said Aird, head of Australia economics at CBA. He highlighted some key events impacting the third quarter data:
The big lift in the Annual Wage Review of between 4.6% and 5.2% by the Fair Work Commission was handed down
The flow of migrants and foreign workers had only just started to lift from a suppressed level; and
The RBA’s rapid and aggressive rate hikes had not had any time 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.”
--With assistance from Tomoko Sato.
(Updates with comments from economists.)
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