Australian wages growth still depressed

A slightly smaller-than-expected wages rise in the first quarter supports the case for a rate cut.

Australian wages growth has been sluggish

Australian wages growth remained depressed in the first quarter, highlighting a key vulnerability of the economy and supporting the case for interest rates to be cut in coming months.

Wages rose by 0.5 per cent in the quarter, slightly less than expected by economists. The index rose by 2.3 per cent from a year earlier, the Australian Bureau of Statistics said.

Private sector wages increased by 0.5 per cent in the quarter, while public sector wages rose by 0.4 per cent over the same period. The strongest sectors for pay growth were health, social assistance and education.

Wages have been flagging over a long period as the economy has adjusted to the end of a mining investment boom and large swings in commodity prices.

Record household debt, falling house prices and rising living costs have meant soft wages growth has become a key national issue ahead of a federal election on Saturday.

The lack of momentum is a significant problem for policymakers, with consumer spending slowing sharply over the past year, putting a brake on economic growth.

Benign wages growth meant consumer prices were flat in the first quarter, prompting the Reserve Bank of Australia to signal the possibility that interest rates will be cut by up to 50 basis points within months.

The trigger for a cut in interest rates will likely come from the job market, it said. Unemployment has stagnated at around 5 per cent over the past six months.

To get wages and inflation moving higher, the unemployment rate has to fall, the RBA said in a statement last Friday.

Some economists have warned the jobless rate might need to fall substantially before there is any meaningful correction upward in incomes growth and inflation.

Core inflation in the first quarter stood at just 1.4 per cent, moving away from the RBA’s desired 2-3 per cent band.

The official cash rate has been held at a record low 1.5 per cent since August 2016. Financial market pricing implies a 40 per cent probability that interest rates will be cut as early as June.

April employment data Thursday will be critical in evaluating the need for lower interest rates. Any weakness in full-time job creation or a rise in the unemployment rate will see bets on a cut by the RBA in June firm up sharply.

Dow Jones