Australia's Labor Market Slows, Pushing Back RBA Rate Cut Expectations


Australia's wage growth unexpectedly decelerated from a 15-year peak in the first quarter, as revealed by Wednesday's data. This suggests a potential culmination in the cycle and adds to indications of a labor market downturn.

It’s worth noting that this wage growth is anticipated to alleviate longstanding concerns regarding inflationary pressures on both prices and wages, thus easing the pressure on the Reserve Bank of Australia (RBA) to enact further rate hikes.

"With job vacancies dwindling and the labor market loosening, we anticipate employers will be inclined to offer smaller pay raises in the coming months," remarked Marcel Thieliant, Head of Asia Pacific at Capital Economics.

Statistics from the Australian Bureau of Statistics unveiled a 0.8% rise in the wage price index for the first quarter, falling short of the market projection of 0.9%. This marks the slowest growth since the conclusion of 2022.

Annual wage growth dipped from 4.2% to 4.1%, aligning with expectations. Notably, private sector growth also decelerated to 4.1%, marking its first slowdown since the third quarter of 2020.

In contrast, public sector wages experienced a 0.5% increase in the quarter, leading to a moderation in annual growth from 4.3% to 3.8%.

Despite the moderation, overall annual wage growth continues to outpace inflation at 3.6%, marking a positive shift towards real wage growth after a period of negative performance.

Further revenue enhancement is anticipated from a significant round of tax cuts set to commence in July. Additionally, the Labor government has unveiled new energy and rent rebates in its annual Budget.

While discounts may temporarily alleviate overall inflation, they can also bolster purchasing power and consequently stimulate demand.

“The positive fiscal impulse to growth is likely to be seen as unhelpful at cooling the economy at the margin," emphasized Andrew Boak, an economist at Goldman Sachs. "However, we do not expect the central bank to be too worried about the new "cost of living" initiatives fuelling a surge in demand against the current backdrop of extremely weak trends in consumer confidence and per capita consumption."

Boak suggests the RBA might initiate rate cuts by November, yet there's a possibility of postponing this decision until the following year due to ongoing inflation pressures in the services sector.

Market indicators imply a minimal likelihood of a rate reduction before April 2025, with the probability of another rate hike this year standing at approximately 8%.

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