Australia: wage growth subdued, but not for long

Australia: wage growth remains subdued, but not for long

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Australia’s labour price index grew just 0.6%q/q in 4Q (J.P. Morgan and consensus: 0.8%), marking the slowest growth rate since early 2000, or just 2.9% from a year earlier. The main drag on total wage growth stemmed from the private sector, where wages were up just 2.5%oya. Public sector wages were up a solid 4.1%oya, remaining above 4% for the fifth straight quarter.

Fourth quarter wage growth was subdued, but this likely is the low point in this cycle given the unemployment rate already has peaked. Indeed, the unemployment rate topped-out at a much lower level than we (and the RBA) forecast thanks to, as highlighted recently in RBA commentary, the flexibility in the local labour market—a large number of employers cut workers’ hours, rather than shedding jobs, during the downturn. With the unemployment rate having peaked, and investment set to boom in the latter six months of the year, skill shortages and capacity constraints will again rear their heads. On this note, tomorrow’s 4Q private investment survey is one of the few important data releases scheduled before next Tuesday’s RBA decision. The survey will include the first glimpse of firms’ spending plans for the year-ended June 2011, providing important colour on the swelling investment pipeline.

The threat of rising wage pressures reinforces our view that the RBA will continue tightening policy throughout 2010 In our view, the cash rate will rise a further 125bp over the remainder of the year but, given heightened uncertainty around how local consumers are dealing with the rate hikes already delivered, the next rise will not come until April. The Board members in March will likely still be uncertain about how the local punters are dealing with the earlier rate hikes, noting that this uncertainty was the main reason the Board sat on the policy sidelines in February.

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ENDS

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