Reserve Bank: we won’t get back to 2020 levels of real wages until later this decade

How quickly economic fortunes can change in a pandemic world. It’s not that long since a lockdown-free Australia could look forward to a rapid recovery and — according to many economists — a return to a more normal monetary policy much sooner than 2024. Some even spoke of rate hikes late next year.

Now the talk is of recession — maybe not, as now looks possible, in the September and December quarters, but in the June and September quarters.

And if that doesn’t discourage talk of early rate hikes, Reserve Bank governor Philip Lowe’s comments to the House of Representatives’ economic committee on Friday, and the bank’s August statement of monetary policy (SMP) released that morning, should.

The RBA’s latest forecasts in the SMP revealed that the central (of three) forecasts is for underlying inflation to be 1.75% over 2022 and 2.25% over 2023. GDP growth was forecast to be 4.4% through 2021 (by December) and 2.5% by the end of 2023. Wage growth was forecast to be 2.75% by the end of 2023, up from 2.25% by the end of this year.

Remember that wages went markedly backwards in real terms over 2020-21 due to a recession-induced slump in wages growth and a temporary spike in inflation. Based on the RBA’s forecasts for inflation and wages, workers won’t start regaining that lost ground until 2023.

And the thing is, the RBA suspects that wages growth will be stuck at those sort of levels. In his evidence on Friday, Lowe said the immediate future was only of wages growth in the low twos:

Only a small number of firms looking to lift wage freezes expect to pay ‘catch up’ wage increases, with most instead anticipating that wages will grow at around the average rates seen immediately prior to the pandemic. Other surveys of wages growth expectations are also broadly consistent with a recovery to around pre-pandemic rates, but with little acceleration beyond that in the next year or so.

Over the past year, Lowe and others at the RBA have talked of wages growth reaching 4% as unemployment fell under 5% towards the “low fours”. Until the latest lockdowns, we’d made surprisingly good progress on the unemployment front, courtesy of closed borders. But as Lowe pointed out: “we have not yet had the same upside surprises in wages and prices that we’ve experienced in jobs and output.”

Why?

There are a number of factors that make it likely that the pick-up in wages and inflation will be gradual. These include enterprise agreements that run for a number of years; a business mindset that is very focused on cost control; inflation expectations that remain low; a relatively high ongoing rate of underemployment; and the fact that it will take some time yet before the spare capacity in the economy is fully absorbed.

That’s why Lowe is so dismissive of suggestions inflation is set to finally make a return to the Australian economic scene in a permanent way: “the fact that wages growth is likely to remain below 3% for the next couple of years means it is very, very difficult for me to see us having an inflation problem. Sure, there will be particular commodities where prices go up because there’s some shortage or disruption in the global supply chain, but eventually — and we’re talking a matter of months or quarters, not years — those supply disruptions will get resolved and those price pressures will go away.”

It means workers in some sectors with higher wages growth will get back to 2020 real wage levels in 2024. But in other sectors, and for the average worker, they won’t recoup the real wage cuts of the last year until the mid-2020s.

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