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Reserve Bank, Treasury diverge on wage growth

Wage growth

Warning that sluggish wage growth could remain lower “than historical experience would suggest”, the Reserve Bank of Australia’s economic outlook paints a slightly gloomier picture than the 2018-19 budget.

The RBA deputy governor Guy Debelle said this morning there is a risk flowing from Australia’s subdued wages growth and the spare capacity in the labour market is part of the problem.

“In Australia, 2 per cent seems to have become the focal point for wage outcomes, compared with 3-4 per cent in the past,” Mr Debelle said.

“While there are signs of wage pressure emerging, they remain localised for now. There is a risk that it may take a lower unemployment rate than we currently expect to generate a sustained move higher than the 2 per cent focal point evident in many wage outcomes today.”

However, the RBA does predict the economy will begin to grow at a faster rate in 2018 and 2019 than it did in 2017.

“That should see the unemployment rate resume its gradual decline. It should also see wages growth and inflation gradually pick up,” Mr Debelle said.

“The gradual decline in spare capacity is expected to lead to a gradual pick-up in wages growth. A critical question is: when will wages start to rise in a meaningful way?”

The 2018-19 budget holds an expectation that wages growth will increase to 3.25 per cent in 2019-20, up from its current 2 per cent, before hitting 3.5 per cent in 2020-21.

Speaking to the ABC, the Australian Institute of Company Directors chairman Elizabeth Proust described this anticipation as “pretty heroic”.

“It is hard to see where that level of wage growth is going to come from in the next few years,” she said.

“They’re Treasury figures, but they’re pretty heroic. I’d like to think in three or four years’ time that will be the level of wage growth that we’re seeing, but we’re not seeing it now.”

Ms Proust’s assessment echoes that of independent economist Saul Eslake, who told Nest Egg the wages growth estimate is “debatable”.

“You have to ask, why would Australia be the only country in the developed world where wages growth can pick up while you still have spare capacity in the labour market?” he said.

Home-owners' pain

For mortgage-holders, the sluggish wages growth means they’ve been shouldering a larger mortgage burden for a longer time than expected, Mr Debelle explained.

While regulators and banks have taken steps to protect household balance sheets, he acknowledged that Aussie home-owners have seen larger portions of their income consumed by mortgage repayments for longer than they had intended.

Check out Nest Egg's five minute recap of the 2018-19 budget here.

Reserve Bank, Treasury diverge on wage growth
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