Not just rugby: NZ beating Australia on wage growth

Stronger wage growth on this side of the Tasman is one of the reasons for the disconnect in expectations around interest rate hikes in Australia and New Zealand, ANZ economists says.

Locally, the ANZ team expects the Reserve Bank of New Zealand will increase the cash rate at its October 6 meeting. It has forecast the Reserve Bank of Australia will hold the cash rate until the first half of 2024.

In a new research note – Not just rugby: NZ beating Australia on wage growth – Melbourne-based senior economist Catherine Birch and Wellington-based Finn Robinson look at reasons for the disconnect.

“One reason for this is that even though both countries have seen remarkable labour market recoveries over the past year, only New Zealand has seen wage growth pick up significantly, alongside rising core inflation,” they say.

“This may be down to the stronger New Zealand labour market in the years prior to the pandemic, the larger increase in unemployment in Australia during 2020, and the sharper rebound in household inflation expectations in New Zealand”.

Both countries had staged quite remarkable economic recoveries through the pandemic, the economists said.

But the disconnect in monetary policy paths was now “sharp”.

“One reason is that underlying inflation in Australia has remained stubbornly low, partly reflecting weaker wage growth,” they said.

“And in contrast to New Zealand, wage growth across many industries in Australia remains below average.”

They note that, for the RBA point of view, even New Zealand’s wage growth of 2.1 per cent (year on year)would still be too low to support a rate increase.

But, wage growth has slipped to 1.7 per cent in Australia (year on year) and it was also clear that wage growth is already accelerating in New Zealand.

“On a quarterly basis, private sector wages rose 0.9 per cent -the largest single quarter increase since 2008, and we expect annual private sector wage inflation to peak at 3.1 per cent in early 2022 –a very respectable number compared to most years since the 1990s.”

The Australian unemployment rate lifted from 5.1 per cent pre-Covid to a peak of 7.4 per cent, a much larger increase than New Zealand’s (4 per cent to 5.3 per cent).

Another factor that had already helped to drive wages higher in New Zealand – and should eventually do the same in Australia – was been the difficulty finding workers, they said.

Both countries have had setbacks with Delta outbreaks but both economies are expected to weather them, the economists said.

“New Zealand’s economic recovery has more or less been a step ahead of most of its trading partners due to the early exit from pandemic restrictions in 2020 – but signs are good for Australia too, with many indicators of labour market slack tightening significantly in recent quarters.”

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