Australia's sharp wages slowdown a two-edged sword

Australian wages grew at the slowest pace in at least 16 years last quarter in what is proving to be a sedative for household spending and tax revenues, but a tonic for employment by keeping labour costs low. Wednesday data showed hourly rates of pay excluding bonuses edged up just 0.5 percent in the first quarter, from the previous quarter when they rose an already slim 0.6 percent.
Annual growth was 2.3 percent and had the dubious distinction of being the lowest reading since the Australian Bureau of Statistics started compiling the data in 1998. Wage gains have been steadily slowing for four straight years and is a long way from the 4 percent-plus pace enjoyed for much of the previous decade. The decline has been a headache for the Liberal National government of Tony Abbott since it acts as a limiter on household spending, and thus receipts from sales taxes, as well as directly crimping revenues from income tax. It has also come at a time when revenues were under intense pressure from a steep drop in prices for the country's major resource exports such as iron ore.
The impact was apparent in the government's annual budget announced on Tuesday as the 2015/16 deficit was predicted to be almost double the initial forecast at A$35 billion. The outlook was also cautious with Treasury expecting wages growth to rise to 2.75 percent in the following two years, before accelerating to a more typical 3.25 percent in 2018/19. "Even that forecast looks unlikely to be met given today's data," said Michael Workman, a senior economist at CBA.
"Wages have three times the influence on the budget that iron ore prices do, so this weakness calls into question the entire parameters for revenue and deficits." Yet the long moderation in wages has helped restrain domestically-generated inflation, with consumer prices up a tame 1.3 percent in the year to March. That in turn provided scope for the Reserve Bank of Australia (RBA) to trim interest rates to a historic low of 2.0 percent last week, its second easing this year.