Australian economic growth gathered pace in Q1 2018 going against the trend of mostly steady to slower paced growth readings among other major economies. Interestingly and notwithstanding patchy slowing in housing activity, there are also some early signs that annual Australian economic growth is maintaining pace around 3.1% y-o-y reported in Q1. Australia is starting to grow faster than the United States and has an employment growth record over the past five years that on a population adjusted basis is much stronger. These comparisons of economic performance in Australia and the United States would seem to indicate that it cannot be too much longer before the RBA starts to lift the official cash rate.
The main factor holding the RBA back from starting to hike the cash rate is a still benign inflation outlook supported by low growth in wages. Certainly the wage price index is still registering low wages growth, 0.5% q-o-q, 2.1% y-o-y in Q1, but the annual change in this measure is slowly increasing and recent wage settlements, including the minimum wage case increase, are pushing to 3% and higher indicating a more pronounced lift before long. One issue that is starting to arise is whether the wage price index essentially measuring wages per employee is the most relevant measure for gauging wage pressure on inflation.
Another measure of wages contained in the GDP data, compensation of employees rose 1.2% q-o-q, 5.1% y-o-y in Q1, the fastest annual pace in five years. This measure covers change in the total wages bill paid in the economy so increasing employment has contributed to the change as well as wage increases granted. This measure represents growth in the wages bill which employers are likely to consider when judging whether rising costs warrant higher prices. The relatively faster growth in total compensation is also helping to boost household disposable income at a faster pace than growth in the wage price index.
Even though the total employee compensation bill is growing much faster than indicated by the wage price index because it is being driven in part by high employment growth and that high employment growth is not driving down the unemployment rate there remains an argument that there is some spare capacity in the Australian economy to be used before inflation pressure really builds a head of steam.
The factors limiting how much the unemployment rate falls in the face of strong employment growth are high immigration providing more workers as well as stronger participation rate in the workforce predominantly among women and the older age groups. The female participation rate, for example has risen a full percentage point over the past year to 60.5% and more than five percentage points since 2000. While the unemployment rate is not falling because of these factors to a level that might be considered consistent with effective “full-employment” and rising inflation there is some risk that the unemployment rate consistent with inflation not accelerating may be higher these days because of the factors preventing it from falling.
More women in the workforce and more older workers in the workforce are lifting the incomes of the households involved and at a pace probably faster than captured by the wage price index. There is a strong case in our view that wages growth when considered on the basis not only of wages per employee but also on the basis of growth in the total wages bill is no longer unduly weak. Also, the factors preventing the unemployment rate from falling also imply that growth in household disposable income is relatively stronger.
Many expressed surprise that Australian economic growth was stronger than expected in Q1 yet the growth in incomes of employees and companies in the quarter would have made it a bigger surprise if the economy was not growing well. It is a fair bet that with stronger growth and the rising wages bill inflation will pick up more than is generally expected over the next year or so too. We continue to expect that the RBA will need to start lifting the cash rate over the next few months and still think that August or September is a likely starting date.