Economic and financial market update

Wages growth: Steady as she goes

Summary:

• Wages growth is picking up;
• But it remains too low for an imminent rate hike;
• The increase in wages growth this year is likely to be steady rather than sharp;
• The earliest rate hike is likely to be August/September of this year;
• I am still looking for the first move to be in the December quarter.
  

Most likely it will be movements in wages that will be the big issue for the domestic interest rate outlook this year. According to the ABS, wages growth (excluding bonuses) increased by 2.3% last year (0.7% in the December quarter). Some in financial markets expected a higher print. But as the RBA has pointed out there are institutional reasons why the pickup of wages growth is more likely to be steady than sharp. 

The big picture is that despite the strong demand for workers across most industries there are few sectors where wages growth is above 3%. And there are no states where wages growth was above 3% in 2021. This included Western Australia where the unemployment rate is already in the 3’s. Indeed, only five industries had wages growth of above 2.5% in 2021 and none of the five largest states. The economic fundamentals do point to stronger wages growth is on the way. But at the end of last year wages growth was still too low.

The wages price index is the best pure measure of changes in wages growth. Pre-1998 Average Weekly Ordinary Time Earnings (AWOTE) was the key wages data that everyone focused upon. The most recent AWOTE number indicated that wages rose by only 2.1% over the year to November 2021, a little under the growth rate for the Wages Price Index. The AWOTE data also confirmed that wages growth will still moderate at the end of 2021. 

An interest rate change in June/July is still possible although the wages data released in February makes it less likely. This is consistent with financial market pricing that has (rightly) reduced the chances of a rate increase in June/July. More probable dates for the first rate change are either August (after the Q2 CPI figures) or September (after the Q2 wages numbers). 

At this stage I am sticking to my view that the first rate hike will be in Q4. My view is not the consensus view. At the time of writing financial markets had priced in almost a one percentage point rate increase by the time I think the first rate move may take place. Maybe the financial markets view will turn out to be correct. But it will also require wages growth to be substantially stronger than what has been indicated from the recent evidence. Time will tell who is right. 

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