March 25, 2019
Australian Markets Weekly: Higher minimum wage unlikely to jolt overall wages out of low-growth rut
In this weekly, we've looked at low inflation, focusing on the role played by weak wage growth.
- Underlying inflation has remained persistently low, undershooting the RBA’s target band for three years now given sluggish growth in average earnings and low inflation expectations.
- The ALP has signalled it will amend the legislation governing the Fair Work Commission in order to lift the minimum wage. We do not think that a larger-than-normal increase in the minimum wage would have a major effect on average earnings unless the minimum wage was quickly redesigned as a living wage aimed at lifting low-paid workers out of poverty.
- This leaves addressing spare capacity in the labour market as the main catalyst for boosting wages growth. Unemployment has fallen to an eight-year low of 4.9%, but there is still spare capacity given the RBA has reduced its estimate of the NAIRU to close to 4.5%. At the same time, labour mobility remains at a historic low, where increased job switching typically foreshadows faster wage growth.
- Low wage growth and low inflation suggest that the RBA can afford to provide more stimulus to the economy, especially as concerns over house price inflation and rapid growth in household debt have eased. We continue to forecast the RBA will cut the cash rate from 1.5% to 1% by November 2019. Developments in overseas economies support this view, even though unemployment printed at a new cycle low of 4.9% in February.
- As for this week’s calendar, RBA Assistant Governor (Economic) Ellis speaks at a housing conference on Tuesday. We will be watching to see if she signals that the RBA is revising its outlook for residential construction, where the RBA’s current forecast profile appears overly optimistic given the sharp fall in work done at the end of 2018 and the steep decline in the leading indicators of activity. NAB forecasts an 18% decline in residential investment over the next two years, while the RBA is looking for a 10% fall. Further out, there have been ongoing press reports that the 2 April Budget will offer more income tax cuts and cash hand-outs for low-income households. These are seen as providing a boost to household incomes given slow wages growth.
- Offshore this week, the Brexit saga is still playing out, while the beginning of an inversion of the US yield curve suggests markets are concerned about an increased risk of US recession. Several Fed officials are speaking this week. Closer to home, we expect the RBNZ to maintain a balanced policy outlook on Wednesday while keeping its cash rate at 1.75%.
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