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Workers who have endured the slowest wage growth on record will never make up for the hit to their weekly pay packets caused by the coronavirus pandemic, with the Reserve Bank warning inertia could hold back incomes for years.
In some of its bluntest language about wages growth, the RBA used the minutes of its July meeting to argue there were few signs of a lift in incomes beyond the level that has plagued the economy for the past half-decade.
The RBA’s minutes show that while there have been some signs of a lift in wages growth, this is only back to where it was before the coronavirus pandemic.Credit:Gabriele Charotte
The bank, which kept official interest rates at 0.1 per cent at its July meeting while announcing plans to slightly wind back its quantitative easing program, has argued wages will need to grow above 3 per cent a year to get inflation back into the RBA’s 2 to 3 per cent inflation target.
Wages growth reached a record low of 1.4 per cent during the depths of the pandemic last year, before inching up to 1.5 per cent annual growth in the March quarter.
Some analysts have argued that with unemployment now at 4.9 per cent and some businesses warning of labour shortages, wages will start to grow much faster in a development that would force the RBA to lift interest rates as early as late next year.
But the bank’s minutes show that while there have been some signs of a lift in wages growth, this is only back to where it was before the coronavirus pandemic.
“In many cases, this reflected a recovery to the 2 to 2.5 per cent average annual growth rate seen before the pandemic, rather than a shift to a materially faster pace,” the minutes showed.
“Information from the bank’s liaison program suggested that firms were not expecting to make up for the period of wage freezes earlier in the pandemic.
“Further, the outlook for public sector wages, and rates of wages growth featuring in new enterprise bargaining agreements, suggested aggregate wage outcomes were unlikely to increase materially beyond pre-pandemic rates in coming quarters.”
Before the pandemic, the RBA cut official interest rates to a then-record low of 0.75 per cent in a bid to get wages growth beyond 3 per cent.
Earlier this month, governor Philip Lowe used a major speech to argue that high levels of immigration over recent years had contributed to slower wages growth.
He has also argued that businesses, used to price competition, had focused on cost-cutting measures at the expense of higher wages for staff.
The minutes show the RBA expects more workers to enter the jobs market, even with international borders closed, suggesting ongoing weakness for wages growth.
“Ultimately, a tighter labour market would be required to overcome the inertia in wage- and price-setting norms and the focus on cost control established over much of the prior decade in Australia,” the minutes showed.
ANZ’s head of Australian economics, David Plank, said wages growth was central to future moves in the official cash rate.
He said while the ANZ believed wages growth would be stronger than that feared by the RBA, it was clear incomes had to lift faster if the central bank was going to increase official rates any time soon.
Another factor may be the fallout from the expanding lockdown of the Australian economy.
Westpac on Tuesday downgraded its forecasts for growth, saying it now expected the economy to contract by 0.7 per cent in the September quarter, with a total cost of $8 billion.
Chief economist Bill Evans and senior economist Andrew Hanlan said output from NSW alone would fall by 3.1 per cent through the quarter if the lockdown extended for eight weeks while Victorian output would drop by 0.1 per cent.
They said while the economy faced a negative quarter of growth in September, the December quarter would show a bounce of 2.6 per cent.
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