© Provided by The GuardianPhotograph: Dean Lewins/AAP
The governor of Australia's central bank is continuing to emphasise that the record low interest rates fuelling a surge in property prices will be part of the landscape for several years, because there is no prospect of a rapid bounce-back in wages growth.
Philip Lowe used a speech to a summit convened by the Australian Financial Review on Wednesday to signal that the official cash rate will remain at historic lows until "at least 2024" because there is no prospect of wages growth hitting more than 3% before that time.
"The point I want to emphasise is that for inflation to be sustainably within the 2-3% target range, wages growth needs to be materially higher than it is currently," the reserve bank governor said.
"The evidence strongly suggests that this will not occur quickly and that it will require a tight labour market to be sustained for some time. Predicting how long it will take is inherently difficult, so there is room for different views.
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"But our judgment is that we are unlikely to see wages growth consistent with the inflation target before 2024. This is the basis for our assessment that the cash rate is very likely to remain at its current level until at least 2024."
Lowe noted that wages growth in Australia was now at 1.4% - "the lowest rate on record". He said wages growth was in a prolonged slump before Covid-19, "then the pandemic resulted in a further step-down".
"Powerful structural factors" explained the story of anaemic wages growth, he said, including increased competition in goods markets, "which makes firms very conscious of cost increases"; the trend towards more services being provided internationally; advances in technology "which have reduced the demand for some types of skills and increased the demand for others"; and changes to the global supply of labour and regulation of labour markets.
"Together, these factors have altered wage and pricing dynamics in almost all advanced economies and these changes are likely to persist. This means that, in the absence of another major shock, it is a long way back to seeing wage increases consistent with the inflation target."
Lowe said he was encouraged by a positive run of data on economic growth and unemployment. The latest national accounts, released this month, showed that the economy grew by 3.1% in the December quarter as the domestic recovery from the pandemic-induced shock consolidated.
But Lowe said the solid numbers "do not negate the fact that there is still a long way to go and that the Australian economy is operating well short of full capacity".
"There are still many people who want a job and can't find one and many others want to work more hours, and on the nominal side of the economy, we have not yet experienced the same type of bounce-back that we have seen in the indicators of economic activity."
Lowe said business investment was below where it needed to be, noting that the rebound in consumption after the end of lockdowns had been "strong" but investment was "a different story".
"While there was a welcome pick-up in the December quarter, particularly in machinery and equipment investment, investment is still 7% below the level a year earlier and over 10% below where we thought it would be at the start of last year," Lowe said.
The weakness was part of a trend, he said: "This weakness in business investment follows a run of years in which non-mining business investment as a share of nominal GDP was already low by historical standards."
A durable recovery from the economic shock associated with the pandemic required business investment to pick up, he said, but added that there was "no magic ingredient for boosting business investment".
"A good starting point, though, is businesses having confidence that the economy will grow and that there will be demand for their products and services," the governor said. "Another important ingredient is having stable and predictable regulatory regimes [and] access to finance on reasonable terms is also important."