Friday 20 May 2016 by FIIG Securities FIIG Securities Opinion

Low wage growth adds to deflationary pressure


Wage growth data tells us two things: firstly, it is a very strong driver of future inflation as wages make up the majority of the costs of products and services.  Businesses need to pass on higher wages through prices, or they wind up with lower profits which they typically won’t do.  Secondly, it tells us about the outlook for economic growth.  Where economic activity is rising, businesses hire more to increase production and services or to complete investment projects such as building construction.  As they hire more people, the labour market gets “tighter”; that is, there are less available underemployed people, and businesses have to compete with each other for labour.  They compete by increasing wages, which drives up wage growth.  Conversely, if there is plenty of “slack” in the labour market and businesses don’t have to compete, wage growth will be low.                                                          

First quarter wage growth in Australia’s private sector was just 0.4% (annualised 1.6%pa), which is even lower than the record low growth rate in 2015.  This suggests that there is plenty of slack in the labour market; out of line with the headline unemployment rate which is misleading. Unemployment means someone has worked less than 10 hours per week.  The issue in Australia in the last six months is that while more people have jobs (so the unemployment rate is lower), the average person is working less hours.  It is hours worked, not employed people, which drive economic activity.  As long as the market continues to focus on the headline unemployment figure, they will underestimate how weak inflation will be.

This wage growth figure is further evidence of the deflationary pressures on the Australian economy and will further fuel the RBA’s concerns about the inflation outlook over the next few years.

 In short, don’t expect cash rates to be rising any time soon.