Reserve Bank sees wage growth hitting fastest pace in years — by 2023

The Reserve Bank says wages growth could pick up to its highest pace in years as the economy recovers from the COVID era.

Key points:The Reserve Bank is upbeat about the pace of economic recoveryIt anticipates wages growing at 3 per cent by late 2023, which would be the fastest pace in a decadeIt's not too concerned about inflation at this stage

It said the recent lift in inflation was not too concerning either, because it was mainly being driven by temporary factors.

The RBA released its latest quarterly forecasts for the economy on Friday, and they contained significant upgrades.

It suggested Australia's economy was showing signs of a strong recovery from the recent lockdowns on the east coast.

It said if the momentum continued, we could see employment growing faster than anticipated in coming years.

That would drive unemployment down faster, and see wages growth pick up to 3 per cent by the end of 2023 (up from today's low 1.7 per cent).

Wages to grow at fastest rate in a decade?

If wages growth hit 3 per cent by the end of 2023, that would be the fastest rate of growth in a decade.

The RBA said that was its central scenario.

"Wages growth should continue to pick up in the near term, as the remaining wage freezes and cuts implemented in 2020 are unwound and labour market conditions tighten," the RBA said.

Wage Price Index RBA SOMP

"Growth in the Wage Price Index (WPI) is anticipated to pick up to above 2 per cent by the end of 2021, to be back in line with pre-pandemic wage growth norms of around 2-2.5 per cent per year.

"WPI growth is then forecast to strengthen further as the unemployment rate approaches 4 per cent, to be around 3 per cent by the end of 2023 — the fastest pace since 2013."

Majority of workers still experiencing little to no wage growth

If wage growth picked up to 3 per cent, it would be a significant turn-around from recent dynamics.

The RBA said more than 50 per cent of jobs were currently experiencing little to no wage growth.

See the image below.

RBA wage changes

It said based on job-level WPI data, the share of jobs currently experiencing wage increases above 3 per cent was still much lower than it was in the 2000s.

It said many firms experiencing difficulties finding labour were still trying to attract and retain employees by using strategies other than increasing wages.

"These strategies include paying targeted sign-on and retention bonuses, offering increased workplace flexibility, providing more internal training and relying more on less experienced staff," the RBA said.

It said wage growth had only been strong for a few specific jobs where labour shortages were acute, such as some types of IT professionals, trades persons and chefs.

However, it said based on information from the Bank’s liaison program, firms were reporting that the prevalence of wage freezes declined in the September quarter and would decline further in the December quarter.

"Firms are generally reporting an expected return to annual wage rises of 2–2.5 per cent over the next year," the RBA said.

Upward revisions to forecasts

But overall, the RBA expects employment, wages, and inflation to pick up faster than expected over the next 24 months.

It means bond traders will continue to pressure the RBA to lift its interest rate target much earlier than 2024. 

Commsec economist Craig James said the RBA would feel a sense of "vindication" with its generally positive forecasts from three months ago.

"Given the fast vaccination take-up rates across Australia and reopening of the south-east of the country, the RBA has upwardly-revised economic growth and inflation forecasts and downwardly-revised the jobless rate expectations," Mr James said.

"Three months ago, the Reserve Bank wasn’t projecting underlying inflation at 2 per cent until mid-2023. Now underlying inflation is seen at 2.25 per cent through 2022.

"The lift in the forecasts for underlying inflation is quite aggressive — a 75 basis points lift for June quarter 2022, from 1.5 per cent to 2.25 per cent," he said.

See the table below, from Commsec, that shows how the RBA's key forecasts have been upgraded in recent months.

RBA forecast upgrades

Kristina Clifton, an economist from Commonwealth Bank, said she thinks the RBA will have to lift interest rates earlier than 2024.

"Supply constraints and strong demand for goods globally is putting upward pressure on inflation," she said.

"Alongside a rebound in demand domestically, we see inflation lifting from here.

"Allowing for some time to confirm that inflation is sustainably within the 2‑3 per cent target, we see the first rate increase taking place in November 2022, with the cash rate peaking at 1.25 per cent in the third quarter of 2023."

Posted 5 Nov 20215 Nov 2021Fri 5 Nov 2021 at 6:32am, updated 5 Nov 20215 Nov 2021Fri 5 Nov 2021 at 7:09amShareCopy linkFacebookTwitterArticle share optionsShare this onFacebookTwitterLinkedInSend this byEmailMessengerCopy linkWhatsApp

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