Wage war against inflation

Slowing wage growth means the Reserve Bank’s economic agenda won't be distracted by inflation concerns, but highlight the economy's transition away from mining.

Slowing wage and employment growth reinforce what many of us already knew – it is a tough time for Australian households. The pain is already being felt in the motor vehicle industry, and we should be concerned about broader retail spending and housing.

According to the ABS, wages excluding bonuses rose by 0.5 per cent in the September quarter, falling short of market expectations, to be 2.7 per cent higher over the year. With headline inflation rising by 2.3 per cent over the year, real wages are barely increasing. Over the past twelve months, wage growth has been fairly similar for the public and private sectors.

Graph for Wage war against inflation

Slowing wage growth is consistent with recent softness in the labour market. Employment rose by only 0.8 per cent over the year to October and the participation rate is at a seven-year low. Under these conditions it is no surprise that wage growth has slowed.

By state, wages are strongest in South Australia and Western Australia, although in Western Australia wage growth has slowed significantly over the past year. Wage growth in New South Wales is at its lowest point in the series history (since September 1997), while growth in Victoria, Queensland and Tasmania are not far off their respective lows. 

Graph for Wage war against inflation

Over the past year, wage growth has slowed across all industries with the exception of retail trade. Wage growth in the mining sector has slowed by 2 percentage points over the year, while wage growth for wholesale trade is down 2.9 percentage points.

Slowing wage growth points to little ongoing pressure on inflation. Wage growth is a key driver of inflation but with the real wage rising only modestly over the year, the ‘inflation genie’ is giving no threat of escaping his bottle. At the very least the Reserve Bank will not be faced with a choice between rising inflation and slowing growth; instead it can focus its full attention on economic growth.

Recent indicators in the labour market are at odds with some other measures of household conditions. Retail trade volumes were up moderately in the September quarter, house prices continue to rise, and measures of consumer sentiment remain at high levels (Consumer sentiment lifts in November, November 13). My general view is that the labour market statistics provide the best read of an economy’s health, and at present are more consistent with an economy in a transitional phase away from a reliance on mining-sector investment.

Consistent with a softening labour market, motor vehicle sales were down by 0.7 per cent in October, to be 3.1 per cent lower over the year. The decline in sales over the past year has been driven by reduced sales of passenger and commercial vehicles. 

Graph for Wage war against inflation

By state, sales growth has been weakest in Western Australia and Queensland over the past year, particularly with regard to commercial vehicles. This may reflect falling mining investment in these states. The plight of Australian car manufacturers has been well documented and in 2013 domestic production is down 7 per cent compared with this time last year.

The rebalancing of the Australian economy will rely on the export sector to do the heavy lifting but household consumption (at over half of real GDP) will need to pull its weight. With little employment growth and wage growth slowing, the outlook for retail spending should be weak in the months ahead. Wage growth is already being felt in motor vehicle sales (big ticket durable items are the ones we pull back on first during tough times) and the housing sector, with first home buyers reluctant to leverage up despite low mortgage rates (The grant rotting housing from the inside, November 13). 

Want access to our latest research and new buy ideas?

Start a free 15 day trial and gain access to our research, recommendations and market-beating model portfolios.

Sign up for free

Related Articles