Productivity rebound to offset stronger wage growth

The further fall in the unemployment rate in March, to a multi-decade low of 5.3%, raises the risk that a sharp acceleration in wage growth will exacerbate inflationary pressures, at a time when consumer price inflation is already approaching 7%. Business surveys suggest wage growth will pick up to at least 5% in the coming months, from 3.4% in March. That said, an acceleration in wage growth might not be inflationary at all if, as we expect, productivity growth also improves. Output per hour worked was still more than 2% below its pre-pandemic level at the start of 2022, but is likely to recover now the coronavirus restrictions have been rolled back and global supply shortages for key inputs are easing. If productivity were to return to its muted pre-pandemic trend, which is a reasonable assumption given firms’ elevated investment intentions, then unit labour costs growth would slow even as wage growth accelerates, helping to keep domestic price pressures at bay.