Wages growth is slowing, unemployment is at historic lows and the Reserve Bank is also cutting rates. Welcome to the weird economy of 2025.
In this crazy world where we have an authoritarian in the White House who wants to be friends with Russia – and enemies with Canada – it is good to occasionally realise that what is happening has not always been happening.
It is also worth realising that, right now, we are experiencing something good in the economy that no one under 55 years of age has ever known.
In December the unemployment rate was 4.0%. It’s easy to forget given unemployment has now been 4.0% or lower for 31 out of the past 39 months that this is unusual. But in the 564 months before February 2022, it had happened just twice.
But that is not the really weird thing.
In December, inflation was 2.4%, which is in the lower half of the RBA’s target range of 2% to 3%. That in itself is not unusual. But to find the last time unemployment was at 4.0% or lower and inflation was below 2.5% we have to go all the way back to December 1970:
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And here’s the even weirder thing. This historically good unemployment and inflation is happening at the same time the Reserve Bank is cutting rates because, among other things, the economy is expected to slow.
In November, the RBA thought Australia’s economy in June this year would be growing at a pitiful 2.3%; now it expects it to be a putrid 2.0%.
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To make things even more weird, despite also expecting household consumption growth to be worse than it expected back in November, the RBA now expects unemployment to rise to just 4.2% not 4.5%.
Weird times and, just to make things even more strange, while all this happening wage growth is slowing.
This is not supposed to be happening.
Very smart economists (including those at the RBA) told us that 4.5% was the lowest unemployment could go before wage growth and then inflation would start to accelerate.
Sorry, but it’s time to update your models because unemployment is 4.0% and the latest wage growth figures out yesterday show that it has slowed from 3.5% to 3.2%. In the private sector, wage growth went from 3.5% to 3.3%. For public-sector workers the drop is even more stark – from 3.7% to 2.8%. So much for the narrative of greedy public servants …
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But what we are seeing is not totally unprecedented.
Rather than go back to the trend that occurred before 2012, where unemployment of 4.0% would normally mean wages were growing at about 4.0% each year, we seem headed back to the pre-pandemic years of 2016-2020 when wages grew more slowly than expected:
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At least we are back to a situation where wages are growing faster than prices. Unfortunately anyone with a mortgage is probably not feeling as if they have more to spend than they did a year ago because, as I noted a couple weeks ago, inflation does not count mortgage repayments.
The employee cost-of-living index, which does count mortgages, rose 4.0% in 2024 – faster than wages:
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So while real wages are now growing when using the official CPI figure, when we include mortgage repayments, wages are still worse than they were a year ago:
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The good news is that things have started to improve and with Tuesday’s decision to cut interest rates those with mortgages will soon be able to buy more things with what they earn.
But the way back is long.
This, of course, is something the opposition has been focusing on. While the current picture is good, they don’t want you to forget what you have experienced over the past two years (and to be honest I doubt you need much reminding).
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When taking into account mortgage repayments, the average wage is still about 8.5% lower than it was in September 2021. For someone who was on $90,000, that is equivalent to losing about $7,687 in purchasing power.
It’s hard to sell the idea that we have turned a corner when that is the reality.
Even if we just use the CPI measure, things are not that much better. Yes, real wages are rising but they are still only back to where they were 13 years ago:
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Imagine being told in 2011 you would get the average wage rise for 13 years and yet you would still only be able to buy the same amount of stuff as you could then.
That’s not a happy picture.
The good news is that in the past six months wages have grown 1% faster than overall prices. Normally that would be a situation where the Reserve Bank is freaking out and thinking it needs to slam on the brakes. And yet rates have been cut, and really no one was at all shocked, and only the most arch conservative economists disagree.
We live in weird times and, while there is long path back to recovering all our lost living standards, at least now we can walk along that path with some hope that the worst is behind us.
Greg Jericho is a Guardian columnist and policy director at the Centre for Future Work
