Try to keep calm - it's the Federal Budget!

Is Australia really another four years from proper wage growth?

Economists (myself included) have been claiming for a while now that the US must be approaching full employment. The official unemployment rate in the US is now 3.9% – the lowest this century. But while wages growth and voluntary quit rates have experienced recent surges, they are still not overly impressive. The UK and Japan too have seen unemployment fall steeply without any meaningful increase in wages.

Australia’s new Federal Budget has assumed that over the forward estimates (four years), our economy too should be knocking on full employment’s door. Does this mean, if we’re using the US as a comparison, we have another four years before our wages start properly rising too?

Four years is plenty of time for a material disruption to occur. A property market correction, an international trade war, or just the continued rise of global interest rates, could significantly damage household financial security. And given their level of indebtedness already, that could be the tipping point for a crash that some have argued is long overdue in Australia.

Australia does have one advantage though, that the US didn’t when it was in our position. Our government is enacting a significant public infrastructure program (albeit a couple of years late) which could accelerate wage growth sooner. We also don’t have the memory of 10% unemployment levels that the US had during the GFC. So our employers may be more willing to offer (and employees more willing to demand) wage rises with less paranoia that another significant downturn will make those rises suddenly unaffordable.

But the RBA is not overly confident about the government’s wage growth projections either. They could still drop our interest rates further (from currently 1.5%) if rising overseas rates put too much pressure on household budgets. We certainly wouldn’t be the first developed economy in recent years to tempt the zero-lower bound – or even negative interest rates. But APRA has only recently started making progress in reigning in bank lending and cooling eastern states property markets. The RBA wouldn’t want to upset that by stoking the fire all over again.

So, unfortunately, there is still plenty that could go wrong before we are well and truly out of the woods.

Sorry.