Even before the 2015-16 federal budget has kicked in on July 1, the latest wages data has undermined a central part of the economic numbers underpinning for the document — and also given the Reserve Bank’s outlook at bit of a whack as well.
As many commentators have noted, the economic forecasts in the budget are noticeably rosier than those of the Reserve Bank, issued in its the second Statement of Monetary Policy earlier this month. The bank is more gloomy about economic growth both this year and next: 2.25% for this year compared to 2.5% in the budget; 2-3% for 2015-16 compared to 2.75% in the budget.
One specific forecast that has the potential to play havoc with both economic growth and tax revenue is wages growth. The budget says wages will grow by 2.5% this year and next, then by 2.75% in 2016-17. But yesterday the ABS’ wage price index for the March quarter surprised commentators by coming in at 2.3% for the year to March, the lowest on record, down from the 2.5% rate at the end of 2014.
That lower rate is still positive in terms of real wage growth, but that’s only due to headline inflation (1.3% in the March quarter) being so low due to the fall in oil prices. Compared with the RBA’s favoured underlying inflation measures, wages growth was flat to slightly negative in real terms. Wages growth has now slowed in 10 of the past 11 quarters, and there is little sign of that changing in coming years, despite the confident forecast from Treasury in the budget. And note that in 2015-16, Treasury expects CPI to climb, cancelling out the real growth in wages.
But the March quarter wage price index result was also a little problematic for the Reserve Bank’s outlook for the economy, detailed in the second Statement of Monetary Policy for the year, released earlier this month. In it the RBA assumes “that wage growth will remain low, but not slow any further … It is possible that employment will continue to grow fast enough to maintain a steady unemployment rate, but given the forecasts for below-trend output growth in the near term, this could probably only be achieved with ongoing moderation in wage growth.”
That is, the RBA expected that wages growth would not slow further, and that continuing weak wages growth was the only thing that could cause unemployment to remain at its current levels rather than rise.
Wages growth, therefore, is already underperforming on the RBA’s expectation. And the RBA agreed with Treasury’s forecast on inflation, anticipating it to rise as the oil price drop vanishes in the rear-view mirror. If wages growth doesn’t recover, then wages will no longer be keeping pace with inflation, and workers will face real wage cuts.
And while the RBA hopes slow wage growth will improve the competitiveness of industry, there’s no real sign in the bank’s forecasts that will happen. It remains very concerned about the weak outlook for non-mining investment:
“Non-mining business investment is forecast to pick up later than earlier envisaged. This follows the weak reading from the ABS Capex survey of investment intentions for 2015/16 and is consistent with the still low levels of non-residential building approvals. It is also consistent with the Bank’s liaison, which continues to suggest that firms are reluctant to undertake significant investment until they see a durable pick-up in the growth of demand. The forecast for an above-average pace of consumption growth from mid 2016, together with the boost to demand for domestic production provided by the exchange rate depreciation over the past couple of years, is expected, in time, to increase capacity utilisation and lead to a rise in non-mining business investment.”
Note the use of the phrase “in time”. That is economist speak for “sometime in the future, we can’t really say when”. The budget is far more certain about that, forecasting a big pickup in non-mining business investment in 2016-17, which will underpin a return to trend growth or above in 2016-17. The government’s budget numbers rely on that optimistic assumption proving right.