Today’s Q2 wages data (+10bps to +1%q/q v. mkt +0.8%q/q) makes it very hard to see the RBA easing rates this year.
Just Friday, the RBA told us (in the Q3 SOMP) that they expected wages to moderate further:
Private sector wage growth was little changed in the
March quarter, to be around the average of the past
decade in year-ended terms, but below the elevated
rates seen over 2005-2008. Business surveys and
liaison suggest that private sector wage pressures
may have eased a little further in more recent months,
consistent with the generally subdued demand for
labour across many non-resource industries. Over
the year to the March quarter, public sector wages
grew at the slowest pace in around a decade.
Clearly, they didn’t…
There’s a tension here between ABS data and the business surveys / RBA’s liaison. This isn’t the first the two have been in conflict this year – the RBA had relied upon feedback from liaison in forming their assessment that the economy was sub-trend in H1 (an assessment they have since revised).
Now, it could be that the ABS data is (again) wrong – and it could be that the business Turkeys have realised that they are voting for Thanksgiving when talking to the RBA’s liaison team … Or it could be something else.
Of the other, alternate, explanations, one I like is about the changed structure of the labour market.
The changed labour market laws were aimed at altering the balance of power in the labour market – in theory this means that higher wage outcomes will associated with any given state of the economy.
This story does not explain why the direct information about wage settlements from liaison and business surveys was misleading, but it does explain the acceleration in wages pressures despite an economy that is characterized by weak (or at least patchy) corporate earnings growth.
Of course, it’s also coherent to argue that with real growth above trend in H1’12, firm wage pressures are exactly what one might have expected!
If my structural story has an element of truth, we are going to have problems going forward – for the decline in nominal GDP growth (due to the falling terms of trade) means that corporate profitability must decline.
If operations are less profitable, but wage claims remain elevated, firms will adjust the quantity of labour they demand to try and maintain profits. This means a higher unemployment rate.
The nominal income boost from the terms of trade felt really good — it gave us lower than expected unemployment, better than expected profit growth, and outstanding growth of real consumption wages.
The stickier wages are, the harder the unwind will be. Expect a larger decline in corporate profits – and therefore a larger increase in the unemployment rate. The shame of today’s data is that it suggests the RBA must wait and see if that means slower wages and hence underlying inflation.
I still think that the unemployment rate will rise further and that inflation will remain low — however my confidence in my low inflation outlook has declined.