Wages respond to lower unemployment as the economy rebounds from delta
Wages growth is responding to a tighter labour market, with sub-4% unemployment likely to pressure the RBA as it contemplates raising rates later this year. At the same time, GDP rebounded strongly in Q4 from a delta-driven contraction, narrowly driven by the consumer with the rest of the economy either stalling or slipping slightly in the quarter.
The RBA recently gave itself more wriggle room on wages when assessing whether inflation has sustainably returned to the 2-3% target, highlighting that it was now looking at the wage price index and the broader measures of labour costs that are released in today’s national accounts, as well as listening to feedback from businesses.
The GDP measures of labour costs are important because they feed into the RBA’s standard mark-up models of underlying inflation. Their downside is their volatility, where they have swung wildly during the pandemic, with hourly wages distorted by extreme moves in hours worked during COVID outbreaks and nominal unit labour costs held down by immense wage subsidies in 2020.
In CCI's view, the Q4 data provide a relatively clean read on costs, with wages growing at around at an annual rate of 3-3½% and unit labour costs up 6% given an extra boost from poor productivity.
This total wages growth is well in excess of the RBA’s forecast of ¾% hourly non-farm growth, which indicates that labour costs are responding more quickly to the tighter labour market than the RBA had anticipated.
The large forecast miss will give the RBA some food for thought, but we imagine that it will discount the rise in unit labour costs given the difficulty in measuring productivity in real time.
Unusually, the RBA will have the Q1 labour cost data when it meets in June, although the major hurdle to an early rate rise remains the election, where the RBA would likely want to avoid the political controversy of hiking either side of the poll that is due by late May.
This leaves August as the first port of call for a rate hike, although unemployment could soon fall below 4% depending on how quickly migration resumes now the border has re-opened, which would make the RBA uncomfortable given that Governor Lowe’s judgment-based estimate of the NAIRU ranges from the high 3s to the low 4s.
The tragedy of Russia’s invasion of Ukraine has created global uncertainty for the RBA, but at this stage it seems unlikely to derail the local recovery. The risk of another COVID variant remains a more pressing uncertainty, although the economic fall-out from the omicron variant seems modest.
As for activity, GDP rebounded strongly in Q4 after contracting by less than had been feared in Q3 on the delta outbreak, with an increase of 3.4% more than offsetting a decline of 1.9%.
The rebound was driven by a powerful recovery in consumer spending, which was up 6%, with firms rebuilding inventories adding about 1pp to growth.
The rest of the economy either went backwards slightly or stalled in the quarter.
Business investment, which had quickly recovered from the short recession in 2020, was little changed. Firms are optimistic on the outlook, although, broadly speaking, investment has languished for several years now.
Trade slipped and exports and imports remain well below pre-pandemic levels due to the collapse in trade in services. The latter should start to reverse now that the border has re-opened, although whether it is a positive for growth will largely depend on whether international tourists and students outnumber Australians heading overseas.
Public demand was also little changed, bringing to an end a long run of strong growth. This is likely to be temporary as state governments have ambitious plans for infrastructure investment, where there may be some capacity constraints from each jurisdiction trying to spend more at the same time.
Residential investment was broadly unchanged at a high level. There is still a large backlog of homes under construction, although demand will be challenged by eventual rate rises.
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Based in Sydney, Kieran Davies joined Coolabah Capital in 2020, an asset manager than runs over $7 billion in fixed-income strategies, and is responsible for macroeconomic research and investment strategy, contributing to the investment decisions...