The Federal government predicts wage growth will be at 3.25 percent by 2019-20.

Today we saw the release of Australian wage growth numbers for the first quarter of 2018. The growth was slightly worse than expected with 0.5% wage growth for the quarter, for an annualised rate of 2.1%.

“Wage growth in the March quarter 2018 continues a period of subdued first-quarter rises,” said ABS chief economist Bruce Hockman.

Currently, the Australian Consumer Price Index (CPI, a measure of inflation) is running at 1.9 percent per year, which means that on a headline level – Australia is experiencing real wage growth (wage growth adjusted for increases in consumer prices). However, this is largely thanks to increases in public sector wages, with private sector wage growth currently matching CPI at 1.9 percent.

Australian wage growth has been subdued for some time, as it has been across the developed world. Domestically, we are seeing this translate into persistently weak retail sales growth, as well as slowing house price growth.

The rate of wage growth is particularly concerning when you consider the forecast wage growth for the next few years. The recent Federal budget has optimistically forecast that wage growth will reach 3.25 percent in 2019-20, and this was used to make a case for income tax cuts and spending increases. However, if wage growth remains subdued, the tax cuts and new spending may start to look untenable.

Perhaps the biggest issue with persistently weak wages growth may be seen if longer-term global interest rates start to rise. We have seen personal debt levels rise in Australia whilst interest rates have been low. However, with global interest rates starting to rise –many Australians may soon face a difficult situation of stagnating earnings, and rising costs of servicing borrowings.

Regardless, today’s release no doubt calls into question some of the forecasts of the recent federal budget.