Tim Hext: Wage growth remains under control – for now

Pendal’s head of government bond strategies TIM HEXT explains the latest wage data and what it means for rates and bonds

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WAGE growth – a key indicator that the Reserve Bank monitors when weighing up rates decisions – was surprisingly benign in the June quarter.

The Bureau of Statistics published the latest Wage Price Index on Tuesday.

The index, which measures changes in salary across 18 industries, showed overall wages grew by only 0.8% in the period.

We’ve now had three quarters in a row of 0.8%.

This indicates an annual rate of only 3.2%. Though a 1.1% number last September gives us an annual rate of 3.6% with rounding.

More surprising is that public sector wages grew only 0.7% in the quarter.

This remains below private sector wages — mostly because three-year agreements in the public sector are slower to respond to changing dynamics.

The opposite was true as wage growth fell across most of the last decade — as you can see in the ABS graph below.

This lower public sector result comes despite a trend for public sector workers to get at least 4% in agreements.

The federal government is now offering 4% next year to unions (and 3.5% and 3% the following years).

Unions have rejected this.

The NSW government has agreed to 4% from July for more than 80,000 workers covered by the Public Service Association.

Teachers and nurses across a number of states have received 4% wage increases over the past 12 months.

Governments offered additional incentives and payments to avoid higher increases given the inflation backdrop.

Wages across the economy are likely to settle on 4% rises for several years yet.

Actual inflation is going to be around 4% and unless unemployment has a very large rise employees will maintain a level of bargaining power.

This 4% is the new 2.5% that we got used to last decade.

GDP data shows a different story

Note that the Wage Price Index is but one measure of renumeration.

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It measures salary across 18 industries on a like-for-like jobs basis through time.  

It does not account for overtime, bonuses, shifts across industries or the extra 0.5% of super paid each year as we move from 9.5% to 12%.

During strong job markets the index underestimates the total renumeration employees are receiving.

When measuring total compensation of employees we rely on GDP data.

This points to total compensation growing closer to 6%, which partly explains the resilience of the economy.

Since even this data lags by three months, Pendal also tracks data from a number of business liaison surveys to create our own diffusion index.  

This currently points to wages being a touch above 4%, in line with the RBA forecast for year end.

What it means for rates and bonds

Overall, the wages number continues to buy the RBA time, with steady cash rates for now.

The market now has a bit less than one hike priced in – and that’s towards year-end or early 2024, so there’s no clear opportunity around mispricing.

Short-ends should remain rangebound for now.

Longer bonds remain vulnerable to higher long-end rates globally.

About Tim Hext and Pendal’s Income & Fixed Interest boutique

Tim Hext is a Pendal portfolio manager and head of government bond strategies in our Income and Fixed Interest team.

Tim has extensive experience in banking, financial markets and funding including senior positions with NSW Treasury Corporation (TCorp), Westpac Treasury, Commonwealth Bank of Australia, Deutsche Bank, Bain & Co and Swiss Bank Corporation.

Pendal’s Income and Fixed Interest boutique is one of the most experienced and well-regarded fixed income teams in Australia.

The team won Lonsec’s Active Fixed Income Fund of the Year award in 2021 and Zenith’s Australian Fixed Interest award in 2020.

Find out more about Pendal’s fixed interest strategies here

About Pendal

Pendal is a global investment management business focused on delivering superior investment returns for our clients through active management.

In 2023, Pendal became part of Perpetual Limited (ASX:PPT), bringing together two of Australia’s most respected active asset management brands to create a global leader in multi-boutique asset management with autonomous, world-class investment capabilities and a growing leadership position in ESG.

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