Australian living standards will recover slower than expected, the Reserve Bank has forecast, acknowledging it has consistently been wrong about a key economic assumption.
Economists at the central bank downgraded their estimate for Australia’s medium-term productivity performance in quarterly forecasts released simultaneously to the RBA board cutting interest rates to 3.6 per cent on Tuesday.
Because productivity is a key factor flowing through to growth in the economy and living standards, both were downgraded by around 0.3 percentage points.
That’s roughly in line with the assumption that trend productivity growth will fall from one to 0.7 per cent.
Labour productivity is expected to recover – increasing 0.7 per cent by the end of 2027, after declining 0.7 per cent over the past year.
The bank conceded it had consistently been proven wrong by productivity outcomes.
“For some time, our forecasts have implicitly assumed that productivity growth was temporarily weak and would gradually return to, and be sustained at, higher historical growth rates,” RBA staff wrote in the Statement on Monetary Policy.
“More often than not, this has not eventuated, resulting in the RBA’s implied productivity forecasts consistently overestimating the actual outcomes.”
The RBA’s new assumption aligns with the average growth rate for non-farm labour productivity – how much extra has been produced per each hour worked – over the past 20 years.
Productivity is closely correlated to real household disposable income, a crude measure of living standards.
It brings the RBA more in line with other Australian financial institutions, including NSW Treasury which recently revised its long-term growth assumption to 0.8 per cent.
The concession comes as RBA governor Michele Bullock prepares to address the government’s productivity roundtable next week.
Treasurer Jim Chalmers has assembled a range of experts, business leaders and unions to discuss how Australia’s tax and regulation frameworks can be reformed in a bid to revitalise the nation’s anaemic productivity growth.
The downgrade in the outlook was not a sign the bank was pessimistic about the summit’s prospects for success, the RBA said.
But any policy changes that might result in higher efficiency would take at least a couple of years to flow through to the economy, beyond the central bank’s forecast horizon.
Through its liaison with businesses, the RBA said firms told it regulation and labour availability were key barriers to lifting productivity.
“Firms said the complexity, cumulative volume and frequency of change in regulation has been hard to manage, particularly for smaller firms.”
Technology was viewed as important to driving productivity, though some businesses noted not all technology enhanced productivity.
While technology might initially drag down productivity as businesses require more staff for its adoption, most survey participants expected artificial intelligence to save labour in the future.
Lower skilled jobs were especially at risk as the workforce transitioned to higher skilled roles.
While GDP growth was revised down as a result of the productivity downgrade, the inflation outlook was largely unchanged, with both the trimmed mean and headline inflation expected to hit the midpoint of the RBA’s 2-3 per cent target band by the end of 2027.
That’s because the RBA assumed the economy would quickly adjust to the lower growth in supply capacity.
The unemployment rate is expected to hold at 4.3 per cent over the duration of the RBA’s forecast horizon.
The bank noted its forecast was “close to full employment”, reiterating that its estimate of the non-accelerating inflation rate of unemployment is still above that of many market economists, who have posited it is actually closer to four per cent.
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