Australians’ real wages are set to shrink as much as 3% in 2022 as salary increases lag behind inflation and may only start to catch up by 2024, the Reserve Bank has said.
In its quarterly statement on monetary policy, released on Friday, the nation’s central bank raised its expectations for price increases while trimming some GDP growth forecasts.
Australia’s economic growth is now expected to slow to 3.5%, down from 4.2% for 2021 and lower than the 5% predicted in the February statement. Growth will quicken slightly in the second half of 2022 to 4.25% before slowing again to 2% by December 2023.
For now the RBA is tipping wage price index (WPI) growth of 3.75% by mid-2024, when it would outpace the consumer price index growth of 3%. By December this year, CPI should peak at 6%, twice the pace of the forecast 3% wages growth.
While the Reserve Bank is lifting its predictions for the wage price index (next ABS instalment due May 18th), it's clearly going nowhere near the annual CPI peak expected near 6% later this year. (Source: CBA) pic.twitter.com/gzrDxu3p9J
— Peter Hannam (@p_hannam) May 6, 2022
“Despite low unemployment rates, wages growth has not kept pace with inflation, so real wages have declined – in some cases noticeably,” the RBA said, referring to conditions in many economies as price pressures rise globally.
The bank noted labour markets in many economies were tightening, with Australia’s jobless rate in March at 4%, the lowest in 48 years. By early 2023, the rate is predicted to reach 3.5%.
As workers “might seek larger wage increases to compensate for the loss of purchasing power”, it remains unclear how successful those efforts will be, and the resulting inflationary feedbacks.
“These uncertainties are salient in Australia, where there is little recent experience of how the labour market and inflation might behave when unemployment is as low as it is currently,” the RBA said.
Excluding the introduction of the GST in 2000, Australia’s 5.1% annual CPI for the March quarter was the highest since the mid-1990s. That spike, reported 27 April, prompted the RBA to lift its cash rate this week for the first time since 2010.
Those rising prices – as well as the lagging wage increases – have stoked debate during the election campaign about the rising cost of living. The ABS will release the March quarter WPI on 18 May – three days before the election – with the real annualised decrease in wages likely to be in the order of two percentage points.
Unions were quick to respond to the RBA’s statement, highlighting the forecasts of real wage cuts lasting until the end of next year. If the predictions are accurate, workers face 21 months of consecutive wage cuts, or half a year more than forecast in the federal budget released at the end of March.
ACTU secretary Sally McManus blamed the government for “nearly a decade of low wage growth and inaction on job security”.
“The Morrison government could be standing up for the wages of working people by supporting a pay rise for a quarter of all working people in the annual wage review, or supporting the wage case being run by aged care workers,” McManus said.
Business groups, though, urged caution in lifting wages without productivity gains.
“Narrowing margins mean businesses are already being forced to pass on higher costs to consumers. Aggressive wages growth will only spur further inflation growth,” said Andrew McKellar, the Australian Chamber of Commerce and Industry’s CEO.
“As the fiscal support associated with the pandemic is withdrawn, the impact of rising prices is expected to reduce consumption growth in 2023, in turn reducing GDP growth to the weaker levels we saw prior to the pandemic,” he said.
“To avoid this trajectory, we need the next federal government to pursue productivity-enhancing reforms that enable businesses to realise their full potential.”
The RBA notes inflationary pressures continue to mount in advanced economies, with rates of 6-9% expected during 2022, or 1-2 percentage points higher than predicted earlier this year. Other central banks started lifting cash rates well before Australia’s, including the US federal reserve earlier this week raising its key rate by 50 basis points, and the Bank of England raising its rate by 25 basis points on Thursday.
Australia’s economy remains relatively resilient, though, aided in part by surging commodity prices that boost national income and bolster government coffers.
The country’s terms of trade – which compare costs of imports versus exports – “are likely to reach a new peak in the first half of 2022 and thereafter remain generally higher than previously envisaged,” the RBA said.
Coal used in power stations and European gas have jumped 30-40% since February, sent higher by Russia’s invasion of Ukraine and the resultant sanctions. Bulk commodity prices were 11% and rural ones 12% higher over the period.
A worrying look at food price changes today from @ANZ_Research ... with oils in particularly taking off. pic.twitter.com/cP3FwMvB44
— Peter Hannam (@p_hannam) May 6, 2022
Near-term growth in the economy would also be supported by non-mining investment as businesses continue to recover from Covid-related lockdowns, although supply disruptions continue for some products as regions of China clamp down again.
Housing price growth has slowed further, with declines now recorded in Sydney and Melbourne, and auction volumes and clearance rates both dropping.
“In most other capital cities and regional areas, price growth has moderated but remains strong, supported by a very low number of properties available for sale,” the RBA said.
Across the past five years, Hobart’s prices are up 69%, or triple Sydney’s pace.
Advertised rents, meanwhile, continue to be “strong in most states, reflecting low vacancy rates and strong income growth”, the bank said.
Without the March WPI to work with, the RBA relied on “liaison contacts” to assess how much wage demands are mounting. While the majority of such feedback reported annual wages growth of 3%, there has recently been a “marked increase” in the share reporting wage rises of more than 3%.
Without the March quarter wage price index - that lands on May 18th - the RBA based its wages assessment on feedback from companies. pic.twitter.com/dvpQclRfnw
— Peter Hannam (@p_hannam) May 6, 2022
The bank’s further rate rise trajectory will hinge in part on how much people expect prices to rise.
While surveys are picking up inflation expectations reaching the highest levels “in many years”, measures of longer-term expectations remain “around 2.5%, although expectations of union officials have picked up to around 3%, the highest level since 2012”, the RBA said.
Bank governor Philip Lowe flagged earlier this week that the RBA’s cash rate target could reach 2.5%. The bank, though, noted the expectations of investors pointed to the rate reaching 2.75% by the end of this year, and 3.5% by the end of 2023.
As of Thursday – prior to big falls in equities and other markets overnight – the cash rate expectations were running slightly higher than the RBA statement.
While investors are having a hissy fit on overseas markets (with Australia to join in shortly), they are also punting on the cash rising to 1% from 0.35% by July, almost 3% by the year's end. #ausvotes #ausvotes2022 #auspol pic.twitter.com/jUrCdDSk3c
— Peter Hannam (@p_hannam) May 5, 2022
Economists at CBA, Australia’s biggest bank, are more cautious, predicting the RBA will hike rates each month from June to August by 25 basis points, and again in November. The peak rate of 1.6% would be reached by next February and the RBA would stay put for the rest of the year.
“In many respects the RBA’s 2023 forecasts should be taken with a pinch of salt,” the economists said in a briefing note.
The CBA also notes RBA's "radical" increase forecasts for underlying inflation, lifting the pace by year end almost 2 percentage points to 4.6%. This means the central bank will become "inflation fighters", and the CBA predicts the cash rate to climb to 1.6% by next Feb. #auspol pic.twitter.com/W03t4c4JGW
— Peter Hannam (@p_hannam) May 6, 2022
“We say that not so much because the RBA’s forecasting record more recently has not been particularly good,” the CBA said. “But rather because the economic outcomes we get in 2023 will be heavily dependent on what type of tightening cycle the RBA delivers.”
