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Money The RBA doesn't sound very confident about the outlook for Australian wages

01:56  16 may  2018
01:56  16 may  2018 Source:   businessinsider.com.au

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Australia ’s latest wage report will be released tomorrow. For a central bank that needs faster wage growth to help achieve its policy objectives, the Reserve Bank of Australia ( RBA ) doesn ’ t sound all that confident it will happen.

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  The RBA doesn't sound very confident about the outlook for Australian wages © Provided by Business Insider Inc

For a central bank that needs faster wage growth to help achieve its policy objectives, the Reserve Bank of Australia (RBA) doesn't sound all that confident it will happen.

That was clear to see in a speech delivered today by RBA deputy governor Guy Debelle, in which he all but admitted the risks for the bank's wage growth outlook are currently to the downside.

"The experience of other countries with labour markets closer to full capacity than Australia's is that wages growth may remain lower than historical experience would suggest," Debelle said in a speech delivered to the CFO Forum in Sydney.

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Today I would like to talk about the Bank 's outlook for the economy. We had been concerned that our forecast may have been a little optimistic, but are now more confident in it. Bishop J and N Cassidy (2017), ‘Insights into Low Wage Growth in Australia ’, RBA Bulletin , March, pp 13–20.

In particular, I'd like to talk about some of the questions we grapple with as we consider the outlook for the domestic economy. While our forecasts for wage growth and inflation are also unchanged, there are some positive signs that make us a bit more confident that the expected pick-up in wage growth

Clearly, Debelle has been keeping a close eye on wage developments in the likes of the United States, United Kingdom and Japan where unemployment has fallen below levels where it typically leads to faster wage and inflationary pressures, known as the non-accelerating rate of unemployment, or NAIRU, for short.

Despite tight labour market conditions in those nations, wage pressures have not responded anywhere near the levels that would have normally been seen in the era before the financial crisis.

That's a troubling scenario for Australia where unemployment still sits at 5.5%, above the 5% NAIRU level estimated by the RBA.

As some other commentators have noted, given recent evidence from abroad, Australia's NAIRU level could be significantly below 5%, casting doubt as to just how quickly wages will pick up even if unemployment continues to edge lower.

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RBA warns Australian wages will be stagnant until 2020. It certainly sounds like she could be telling us not to get our hopes up too much before 2020. If the tipping point theory is correct, we have another two years of meagre pay rises ahead.

We're very , very confident with the sound . The Board remains confident on the outlook for the year as performance is in line with internal expectations more. The Australian Football League is cashed-up and confident after signing its record .

Adding further doubt on the prospects for a pick-up in wage pressures, Debelle pointed to the chart below that shows the percentage of Australian firms estimating they will offer pay increases in excess of 3% per annum has fallen in recent years.

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"In Australia, 2% seems to have become the focal point for wage outcomes, compared with 3–4% in the past," he says.

"Work done at the Bank shows the shift of the distribution of wages growth to the left and a bunching of wage outcomes around 2% over the past five years or so."

As such, Debelle said "there is a risk that it may take a lower unemployment rate than we currently expect to generate a sustained move higher than the 2% focal point evident in many wage outcomes today".

Again, an admission that unemployment may need to fall below 5%, perhaps significantly so, before wage pressures begin to accelerate.

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Despite another weak increase last quarter, the bank appears confident that Australian wage In the wake of Australia ’s soft December quarter wage price index released late last month — a report that revealed very little sign of wage Fitting with the RBA ’s message on outlook for wage growth, it

Like its glowing assessment of current labour market conditions, the Board also sounded more upbeat about the outlook for wage pressures. Again, another subtle hint that it’s growing more confident about a pickup in wages . Keeping with that theme, the RBA remained upbeat about the Australian

The longer low wage growth outcomes persist, the more likely it is they become the norm, rather than the exception. Indeed, it could become entrenched.

As RBA governor Philip Lowe said earlier this year, it would likely take wage growth to hold at around 3.5% per annum for a period of time in order to bring inflation back to within the bank's 2-3% medium-term target.

By continually offering low pay increases, it reinforces the low inflation landscape that's been seen in Australia in recent years, an outcome that will filter back into wage negotiations in the future, keeping the linkage between low wage growth and low inflation in place.

While Debelle says recent data on wage growth, along with industry liaison suggesting pockets of wage pressures are emerging and a greater percentage of firms expecting to offer faster pay increases, offers some assurance that wages growth has troughed, the question that remains is how fast will wage growth pick up?

Based on recent trends both at home and abroad, it's unlikely to be much given the current set of circumstances.

Given the degree of uncertainty that exists, Australia's wage price index for the March quarter, out tomorrow, measuring growth in ordinary hourly pay rates, comes at an opportune time.

Unfortunately for workers, the RBA and treasury officials who are also anticipating a strong pick-up in wages in the coming years to help boost fiscal revenues, it's unlikely to deliver much good news. At least, according to economists.

The median forecast looks for a quarterly increase of 0.6%, leaving the annual rate unchanged at 2.1%.

While that will reinforce the view that wage growth has now bottomed, another undershoot, as has been seen frequently in recent years, would be a troubling outcome.

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<p>The RBA declined to comment on an ongoing matter.</p>With wage growth in Australia crawling around the slowest pace on record, Reserve Bank of Australia (RBA) Governor Philip Lowe recently called on workers to demand fatter pay hikes.

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