Barclays on the Australian wage index and the implications for the RBA

Wage growth remains slow. Despite the increase in the minimum wage, overall wages rose just 0.5% q/q, similar to the pace gains in the previous two quarters. On a y/y basis, wage growth picked up to 2.0%, improving modestly from 1.9% in Q2. Private-sector wages rose 0.5% q/q (Q2: 0.5%), while the increase in public-sector wages slowed to 0.5% q/q (Q2: 0.63%).

On a y/y basis, private sector wage growth remains around 1.9% y/y. The weakness in private-sector wage growth continues to be driven by the mining sector, although there was an improvement in wage growth in the manufacturing, financial and business services sectors. Wage growth also picked up in public administration and social sectors. Wage growth in retail trade continued to soften amid rising competition from online retailers, slowing to 1.6% y/y, its weakest rate since the series became available in 1998. The slowdown in the housing market meant that construction sector-related wages remained weak at 1.8% y/y, even though wage growth in the real estate related sector improved modestly, albeit from very low levels.

Wage growth continues to lag employment trends. Even though full-time employment has been rising strongly through 2017, wage growth continues to lag behind those gains. This partly reflects low wage price expectations, and in its recent Statement on Monetary Policy, the Reserve Bank of Australia flagged the lack of wage growth remains as a puzzle for the future direction of policy. Indeed, the strength of the employment conditions was flagged by the RBA as a key source of domestic uncertainty, especially the assessment of spare capacity, and its subsequent impact on wage inflation. We believe the RBA will be closely monitoring the developments in the labour market.

In terms of monetary policy, we expect the RBA to stay in a holding pattern in H1 18 and wait for signs of a more broad-based recovery across businesses and in household incomes before firmly signalling any change in policy stance. We maintain our forecast that the RBA will raise the policy rate 25bp at the August 2018 MPC meeting, followed by a 25bp rate hike in November.

15 Nov 2017 - 01:31- Fixed Income- Source: Barclays

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