The Risk Of Another RBA Rate Cut Later This Year Is On The Rise

Originally published by AMP Capital

Australian wages rose by just 0.5% in the March quarter, leaving annual wages growth at a record low of just 1.9%. Private sector wages growth is even lower at just 1.8% yoy. In Western Australia wages growth slipped to just 1.2% year on year reflecting the downturn in the WA economy

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Continued high levels of unemployment and particularly underemployment – which together total over 14% of the workforce - are clearly keeping wages growth at record low levels. Workers simply have no bargaining power.

With the cost of living as measured by the CPI now rising faster than wages real wages are falling and this will act as a drag on consumer spending. Weak wages growth also implies ongoing downwards pressure on underlying inflation which risks staying below the RBA’s 2-3% inflation target for longer than its currently assuming. Ongoing record low wages growth also underlines the risk that the Government won’t see the doubling in wages growth it assumed in the Budget over the next four years and as a result government revenue growth will disappoint further delaying the return to a budget surplus.

Consumer confidence fell 1.1% in May to a below average reading of 98 according to the Westpac/Melbourne Institute Consumer Survey.

The Budget looks to have provided no boost to consumer confidence with the positives of more spending on infrastructure and education possibly being offset by the impact of an increase in the Medicare levy (albeit its two years away and may not happen). Continuing softness in consumer spending at a time of high underemployment, weak wages growth and a declining wealth effect if Sydney and Melbourne home price gains slow points to continued softness in retail sales going forward.

Consumer confidence continues to lag business confidence by a wide margin, but it’s hard to see the latter remaining strong unless consumer confidence picks up driving stronger consumer spending.

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Implications for the RBA

The combination of continuing record low wages growth and soft consumer spending indicate that the risk of another RBA rate cut this year is far higher than a hike. Our base case is that rates are on hold but if retail sales and wages growth don’t show signs of picking up soon and home price gains in Sydney and Melbourne slow then the RBA will cut again by year end.