Forget any big pay rises for years – RBA

Workers are unlikely to get a significant pay hike until the middle of the decade, Reserve Bank governor Philip Lowe has signalled. Lowe also said that businesses and governments would need to lead the way in driving prosperity.

Speaking before a parliamentary committee, Lowe said that driving wage growth above its current – and historically low – level would require an even tighter labour market than the one that existed before the COVID-19 slowdown, according to a report by The Australian.

“Drawing on the experience before the pandemic, I think we need a low unemployment rate – lower than we got to before the pandemic – to be sustained for a number of years,” he said.

Despite Lowe’s glum wage-rise predictions, the RBA’s latest economic forecasts are decidedly less pessimistic than its November outlook. The central bank now predicts that the jobless rate will fall from 6.6% to 6% by the end of 2021, despite some jobs being lost after the expiration of the JobKeeper program on March 28.

Even so, wage growth is likely to be slow. The RBA predicted that the key jobless measure will return to its pre-pandemic rate 5.25% by the end of 2023.

“Even by mid-2023, the unemployment rate is likely to be higher than is consistent with a tight labour market and a strong pick-up in wages growth,” the central bank said.

Annual growth in the wage price index “is expected to remain below 2 per cent over the next few years, even slower than the low rates recorded prior to the pandemic,” the RBA said.

That suggests wage growth of around 3.5% to 4% would only begin in the second half of the decade, The Australian reported. Even in the RBA’s “upside scenario”, in which unemployment drops below 5% in the second half of 2022, the prospect of significant pay hikes is a way off.

Westpac chief economist Bill Evans said that “such forecasts suggest that the RBA may be extremely doubtful that even 2024 seems a realistic goal” for raising the cash rate above its current record-low 0.1%.

And Lowe said that even that historic low rate wasn’t going to drive prosperity on its own.

“Monetary policy cannot drive increases in our living standards,” he said. “We can maybe get there a bit quicker with monetary policy, we can maybe avoid some of the downsides, but the Reserve Bank can’t drive sustainable increases in living standards. That comes from businesses and governments investing in the things that make us more productive over time.”

Lowe told the committee there was no “silver bullet” to getting businesses investing again, but that in the short term, “getting the economy moving again will encourage investment.”

Lowe identified the digital economy and the aged-care and energy sectors as three key segments of the economy where “if we can get the policy settings right, I see tremendous opportunities for Australia.”