Australian Markets Weekly: 31 July 2017

The reasons for slow wages growth in Australia and around the world is a topic occupying the minds of central bankers.

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Time for another wage/tax tradeoff?

  • The RBA Governor’s Speech last week focused on the reasons for slow wages growth in Australia and around the world (spare capacity in the labour market, end of mining boom, lower productivity, increased job insecurity, greater competition due to globalisation and technology). This is a topic also occupying the minds of other central bankers.
  • Clients should monitor the trends in wages growth in the low unemployment regions of the world (Germany, Japan, the UK and US) and in NSW in Australia for an assessment of the degree of structural change in the labour market.
  • One possible left-field solution to the “problems” of low wages growth and the failure of the Senate to support the passage of the Government’s corporate tax cuts for larger businesses, could be a different type of wage-tax trade-off. In the 1980s, there were a number of income accords, whereby income tax cuts were traded off in place of wage rises so as to reduce inflation. Could an agreement be fashioned to trade-off a corporate tax cut for bigger businesses for wage increases for workers, so as to lift wages growth across the country?
  • The RBA will be under continued focus this week with the Board meeting Statement tomorrow and the quarterly Statement on Friday. While no change in policy is odds on, it will be all about whether there is any more anxiety about the exchange rate, together with the RBA’s readings on the economy and their forecasts.
  • We expect the RBA to acknowledge the rise in the currency without being unduly alarmed, especially given the weaker USD is a good part of the story. No material change in the forecasts seems likely, though the Bank is expected to recognise the improving domestic economic indicators of late without any formal change in the monetary policy bias from the very neutral setting.

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