Australian pay grew at a weaker than expected pace in the final three months of 2022, suggesting the economy will avoid a wage-price spiral and prompting traders to pare bets on future interest-rate increases.
(Bloomberg) — Australian pay grew at a weaker than expected pace in the final three months of 2022, suggesting the economy will avoid a wage-price spiral and prompting traders to pare bets on future interest-rate increases.
The Wage Price Index climbed 3.3% from a year earlier, slower than the 3.5% median estimate of economists, government data showed Wednesday. On a quarterly basis wage growth actually slowed to 0.8% from an upwardly revised 1.1% in the three months through September.
The result suggests price pressures aren’t quite as strong in the economy as the Reserve Bank feared, prompting swaps traders to pull back their expected peak in the cash rate to about 4.2% from 4.35%. Australian bond yields trimmed gains after the data to 3.55%, compared with 3.7% earlier in the morning, and the currency weakened to be 0.1% lower on the day.
“It was quite a disappointing result, it’s a big miss,” said Diana Mousina, a senior economist at AMP Capital Markets Ltd. “If you look at the quarterly pace, it looks like wage growth has peaked and it confirms my suspicion that the RBA’s forecasts are too high.”
For the central bank, which expects pay gains to breach 4% and peak at 4.25% late this year, the data will be a welcome reprieve as it tries to keep inflation expectations anchored to its 2-3% target. The figures suggest wage growth is relatively contained in Australia compared with economies from Washington to Wellington and remains well below inflation of 7.8%.
But the gap with inflation means that Australian real wages are falling sharply, pressuring the center-left government as it tries to shield voters from the worst effects of inflation.
The report comes as recent data showed momentum in the jobs market has slowed, with unemployment edging up to 3.7% and job vacancies coming off very high levels.
What Bloomberg Economics Says…
“Australia’s disappointing fourth-quarter wage growth adds to the flow of data indicating the economy is beginning to weaken. The data are likely to put a pause back on the table at the RBA’s next meeting in March. Even so, we think the central bank will opt for another 25 basis point hike”
— James McIntyre, Economist.
For full note, click here
The RBA, which is worried about the risk of a price-wage spiral, is paying close attention to price-setting at firms and labor costs. Faster inflation prompted the central bank to consider a half-point hike this month, minutes of the meeting showed. It eventually settled for a quarter-point increase, taking the cash rate to a 10-year high of 3.35%.
The central bank expects further rate hikes will be needed, while adding that it remains uncertain how much further policy will need to be tightened to contain prices. It has raised rates by 3.25 points since May.
The government welcomed the pickup in wages after a protracted period of stagnation, and will be heartened that the result suggests inflation expectations are less likely to become unmoored.
It will release its budget in May, which is likely to have some targeted cost relief measures, although Treasurer Jim Chalmers has said it will keep a tight leash on fiscal spending.
“The disconnect between wage growth and inflation is devastating for households across the country, with cost-of-living pressures easily outstripping wage gains,” said Callam Pickering, an economist at global job site Indeed Inc. “The acute headwinds faced by the household sector indicate that there is considerable uncertainty over the direction of the economy later this year.”
Today’s report also showed:
- Annual private sector wage growth of 3.6% was far stronger than the public sector’s 2.5%
- Manufacturing and wholesale trade recorded the strongest annual increases, while the result was weakest for public administration, health care and social assistance
The WPI excludes job switching, promotions, pensions and other non-wage payments, suggesting it’s “likely understating growth in aggregate labor costs,” said Goldman Sachs Group Inc’s chief Australia economist Andrew Boak. He added that broader measures of labor costs will be released in fourth-quarter GDP data due next Wednesday.
–With assistance from Tomoko Sato and Garfield Reynolds.
(Adds comments from economists, updates market reaction.)
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