Next month, we’ll learn whether Australian workers have officially begun going backwards, when we get the March quarter wage index figures from the Australian Bureau of Statistics.
Wage growth is partly driven by terms of trade, economists say — when we’re getting more for our exports, wages rise; when we get less, they stop rising. That’s been the basis for discussions about why Australian workers have endured stagnant wage growth in recent years. “A range of related factors appear to explain much of the decline in wage growth in Australia in recent years … The decline in the terms of trade and falls in mining investment appear to have played a particularly important role,” a Reserve Bank bulletin concluded in mid-2015. “With an end to the trend decline in the terms of trade now in prospect, positive real income growth should return,” Prime Minister and Cabinet (and former Treasury) deputy secretary David Gruen said as recently as February this year.
Except that’s not how it’s working out so far. Import and export data yesterday shows an 8.2% rise in our terms of trade in the March quarter — bringing terms of trade improvement over the last twelve months to just under 30%. And yet that has had no impact on wages, which remain stuck below 2% annual growth.
It will be eight days after the budget when the Australian Bureau of Statistics is due to release the Wage Price Index (WPI) for the March quarter, and there will be a lot riding on it. Will we finally see some translation of the lift in terms of trade over the last twelve months into wage growth, or more of that same stagnation? Inflation in the March quarter was 2.1%; if the wage index remains around its December quarter level (1.9%), it will means the real wages growth has turned negative. The only reason it has been positive in recent quarters has been because inflation has been so extraordinarily low — and for most households, sub-2% wages growth won’t feel like real growth no matter how low inflation goes. That translates into belt tightening, resulting in the lower retail sales — they’ve been just ticking over at 0.1% and 0.2% monthly growth so far this year.
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The WPI data will also provide some context for the wages growth forecasts in the budget papers, which have proved too optimistic in recent budgets and MYEFOs, thus contributing to revenue writedowns (and speaking of which, will Scott Morrison prove to be the first treasurer since Peter Costello to reveal a better-than-forecast revenue result, even if only by a few hundred million?)
This week’s inflation rate, however, will be good news for another key forecast, nominal GDP. March was the first quarter since the September 2014 quarter that the annual inflation result has reached (just) into the RBA’s 2-3% target range — although underlying inflation, which strips out volatile price movements, was 1.8% over the year, after a quarterly rise of 0.45%. The RBA holds its next monthly board meeting on Tuesday and will leave the cash rate at a record low 1.5%. But if real wages growth turns negative, that will only frustrate the central bank, which has previously indicated it would like to see wages growth pick up.
The government, however, is still ambivalent about wages growth. “It has been some time since most hardworking Australians have received a decent pay rise,” Morrison said this week. At the same time, the government is pushing for penalty rate cuts for some of the hardest-working and lowest-paid Australians, and criticised minimum wage rises in its submission to the Fair Work Commission. Who, exactly, the hardworking Australians are that should be allowed a decent pay rise in the eyes of the government is thus a mystery.