Inflation spike to erode wages amid brighter economic outlook: economists

A spike in inflation is set to erode purchasing power this year as wage growth remains subdued, though the wider economy looks brighter, economists say.

The inflation-adjusted value of wages will likely shrink 3.6 per cent in the 12 months ended March 2011 as the October 1 hike in GST pushes up prices amid tepid growth in private sector salaries, according to the New Zealand Institute of Economic Research's consensus forecast of ten financial and economic agencies.

The wage outlook has dimmed since the previous survey in March, which showed real wages were probably going to decline 0.5 per cent in the year.

Nominal wage growth of 1.5 per cent is expected in the 2010/11, down from 1.9 per cent forecast in the previous survey, and lagging behind the 5.1 per cent projection for the consumer price index. The CPI forecast was 2.4 per cent in the previous survey.

Nominal wage growth is expected to pick up speed to 3 per cent in the 2011/12 year, compared to the 2.6 per cent in the previous survey, though this is offset by the higher CPI forecast of 2.7 per cent, from 2.4 per cent.

"The private sector wage outlook is wildly divergent. Forecasts for March 2011 range from a respectable 2.9 per cent to a lacklustre 0.6 per cent decline in wages," said Peter O'Connor, economist at NZIER, in his report.

"A slow recovery in wages is reflected in only a gradual household spending recovery over the forecast horizon."

The government will hike the goods and services tax to 15 per cent and cut personal income tax in October this year as it seeks to rebalance the economy in favour of savings and away from property investment.

Though the wage outlook is grimmer, the economists are more upbeat about New Zealand's economy, lifting the mean forecast 0.1 percentage points to 3.2 per cent and 3.3 per cent growth over the coming two years from the previous survey.

NZIER's O'Connor said the consensus is that the economy is "on the path to sustained and sustainable economic growth" and is "rebalancing from consumption and housing towards exports and returning towards trend growth."

The survey precedes first balance of payments and gross domestic product data that will come out over the next two days. The current account deficit is forecast to shrink to an annual $5.07 billion, while the economy is forecast to have grown 0.5 per cent, according to a Reuters survey.

Reserve Bank Governor Alan Bollard has put down much of New Zealand's recovery to unexpected growth in export receipts, which has been underpinned by resilient commodity prices and strong demand in Asia.

The NZIER survey predicts exports will keep growing strongly this year and the next, with forecasts up 3.5 per cent from 2.7 per cent and 5.3 per cent from 5.1 per cent respectively.