Australian wages and inflation: up and away

January labour market data was stronger than expected despite the disruptions caused by the Omicron variant.

Employment rose +13,000, unemployment was unchanged at 4.2%, and the participation rate rose to 66.2% (from 66.1%).

However, instead of impacting the unemployment rate, the impact from the Omicron variant was concentrated in hours worked, which fell 8.8% month on month.

Data on the reasons for working fewer hours are consistent with people withdrawing labour due to sickness or other reasons more so than because of a fall in the opportunities to work and suggests labour market activity will bounce back strongly in February as virus disruptions receded.

Roy Morgan Research has a different view.

They say:

The ABS unemployment figure of 4.2% hides real toll of the ‘Omicron strain’ on Australia’s employment markets

This figure hides the over 570,000 Australians who didn't work in January who normally would.

The ABS figure for January counts as employed an additional 214,400 Australians who were working zero hours for 'economic reasons' or 'other reasons' - such as being forced into isolation for being a close contact of a confirmed case. In addition, the ABS notes 449,900 workers worked zero hours due to illness, injury or sick leave in January.

This figure is nearly five times higher than the average for January from 2016-2021 of 92,880 - a difference of 357,020. If these 571,400 non-workers (214,400 off work for economic and social reasons and 357,020 higher than usual not working due to illness) are added back the ABS unemployment estimate for December increases to 1,152,000 (8.3% of the workforce) - in line with Roy Morgan's unemployment estimate of 8.2%.

The ABS also claims there are an additional 933,000 Australians (6.7% of the workforce) under-employed for a total of 2.1 million unemployed or under-employed (15.1% of the workforce).

Unemployment to fall further

ANZ Bank economists are now forecasting Australia’s unemployment rate to fall to the low 3s by the end of 2022 and remain there through 2023, with underemployment also falling further in 2022.

They say this should support an acceleration in nominal wage price index (WPI) growth to around 3.5% year on year by the end of 2022 and 4% y/y by the end of 2023.

But real wages have further to fall before they turn around.

ANZ suggest that with supply chain pressures likely to keep goods inflation elevated in the near term, we should expect annual underlying inflation to accelerate some way above the RBA’s target band in 2022, reaching a peak of 3.6% in the 2nd quarter of the year.

Then as some of these pressures ease, inflation is likely to slow to around the top of the RBA’s target band by the end of 2023.

This is consistent with ANZ's expectation that the RBA will start hiking the cash rate in Q3 2022, reaching 0.75% by end-2022 and 2% by end-2023, with more gradual rises to follow.

In ANZ's view, it’s likely that the peak cash rate in this cycle will have a 3-handle.

Real wages to fall through 2022.

Australia’s GDP and labour market recoveries have outpaced most of the rest of the world.

But inflation and wage growth have not, with the US, euro area, UK and New Zealand ahead on these measures, in some cases significantly so.

But we think the same patterns are emerging in Australia, albeit delayed and to a lesser extent. We expect underlying inflation to break above the RBA’s target band in the first half of 2022 and nominal wage growth to well and truly shake off its 2-handle.

But Australia hasn’t been able to avoid a fall in real wages, reducing households’ purchasing power.

And ANZ expects real wages will get worse before they get better, falling through much of 2022.

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About Brett Warren Brett Warren is National Director of Metropole Properties and uses his two decades of property investment experience to advise clients how to grow, protect and pass on their wealth through strategic property advice.