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Wage growth set to lift from lows

Wage growth set to lift from lows

Wage growth lifted in the June quarter at the fastest rate in seven years and CommSec Chief Economist Craig James forecasts there are a number of reasons why there could be further pick-up from here.

The Reserve Bank of Australia (RBA) recently noted that its chats with businesses had revealed stronger demand for some skilled workers. If the job market continues to improve as expected then wages should also start to trend higher, says James.

The Wage Price Index for Australia for the June quarter 2017 released by the Australian Bureau of Statistics (ABS) showed:

  • The wage price index rose by 0.5% in the June quarter to be up 1.9% over the year. Annual underlying inflation remains below wages at 1.7%. The broad household consumption deflator is also lower, up 1.3% over the year to March.
  • Private and public sector wages that include bonuses rose by 0.7% in the June quarter – the strongest June quarter result since 2010.
  • Private sector wages rose by 0.4% in the June quarter while public sector wages rose by 0.6%. Annual growth of private sector wages held at a record low of 1.8% in the quarter. Annual growth of public sector wages held at 2.4%.
  • Annual wage growth across States and Territories: NSW 2.0%; Victoria 2.0%; Queensland 1.9%; South Australia 2.1%; Western Australia 1.4%; Tasmania 2.0%; Northern Territory 1.9%; and ACT 1.9%.
  • Industries with fastest annual wage growth: healthcare and social assistance (up 2.6%) and education and training (up 2.4%).
  • Industries with slowest annual wage growth: mining (up 1.1%) and rental, hiring and real estate services (up 1.2%).

What does it all mean?

The ABS data raises the question, "Has wage growth bottomed?" CommSec's James says.

"There are good indications to suggest that it has. Including bonuses, wage growth lifted in the June quarter at the fastest rate in seven years. And the Reserve Bank noted yesterday that its chats with businesses had revealed stronger demand for some skilled workers. If the job market continues to improve as expected then wages should also start to trend higher.

"At present consumer confidence is soft and most of the blame is attributed to slower wage growth. A few years ago wages were rising at a 3-4% annual rate. Today it is more like 1-2% growth. Still, wages are growing at a slower pace because growth of consumer prices has also eased. While consumers say that they aren’t optimistic at present, they are still spending. Real retail spending rose 1.5% in the June quarter – the fastest growth in eight years.

"Clearly a lot more items of the consumer basket have become more affordable over time, rather than less affordable, including cars, travel, food, clothing and electrical appliances," James says.

Outlook for wages growth

He says that looking ahead there are a number of reasons to expect wages growth to pick up from here.

"The Fair Work Commission (FWC) recently announced that minimum wages will increase by 3.3% beginning 1 July 2017, up from a 2.4% increase in the previous year. This was the largest increase since 2010.

"Around one quarter of employees are covered by awards. As a direct result this will add around 0.2ppts to annual wages growth in the third quarter. However the contribution may well be larger as there are also flow-on effects over the year to other workers not covered by awards." 

What are the implications for interest rates and investors?

The Reserve Bank sounded hopeful that wage growth had bottomed: “Information from liaison indicated that some employers were finding it harder to attract workers with particular skills. If this were to broaden, wage growth could increase more quickly than forecast, which would see inflationary pressures also emerge more quickly.”

"Clearly the job market is something to watch," James says. "The job market has strengthened and it seems that out-performing businesses are lifting bonuses in the hope of holding on to good staff. Those employees that are securing bonuses are doing well given that inflationary pressures are still contained."

State and Territories breakdown

  NSW VIC QLD SA WA TAS NT ACT AUSTsa
q%ch 0.3 0.4 0.3 0.2 0.3 0.2 0.2 0.6 0.4
y%ch 2.0 2.0 1.9 2.1 1.4 2.0 2.1 1.9 1.9

Source: ABS

This article is intended to provide general information of an educational nature only. This report is approved and distributed in Australia by Commonwealth Securities Limited ABN 60 067 254 399, AFSL 238814 (CommSec) a wholly owned but non-guaranteed subsidiary of Commonwealth Bank of Australia ABN 48 123 123 124, AFSL 234945 (the Bank). The Bank and its subsidiaries have effected or may effect transactions for their own account in any investments or related investments referred to in this report. This report is not a recommendation to buy, sell or hold any securities, property, real estate or financial products, and has been prepared without taking account of the objectives, financial or taxation situation or needs of any particular individual. For this reason, any individual should, before acting on the information in this report, consider the appropriateness of the information, having regard to the individual's objectives, financial or taxation situation and needs and, if necessary, seek appropriate professional advice. Past performance is not a reliable indicator of future performance. This report is produced by Commonwealth Securities Limited based on information available at the time of publishing. We believe that the information in this correspondence is correct and any opinions, conclusions or recommendations are reasonably held or made as at the time of its compilation, but no warranty is made as to accuracy, reliability or completeness. To the extent permitted by law, neither the Bank nor any of its subsidiaries accept liability to any person for loss or damage arising from the use of this report.