Australia’s dire productivity performance doesn’t look like rebounding any time soon, with troubling implications for the Reserve Bank’s interest rate path.
Data released on Thursday reinforced the challenge the nation faces to get productivity growing again.
Private capital expenditure – essentially investments by businesses in equipment or infrastructure that enables them to make more stuff – fell 0.1 per cent in the March quarter, the Australian Bureau of Statistics reported.
The result underwhelmed economist expectations of a 0.5 per cent increase.
Business investment had been declining as a share of the economy since the mining boom and was almost 50 per cent lower as a proportion of GDP than it was 12 years ago, AMP economist Diana Mousina said.
This matters because capital expenditure is an important component of productivity growth, which has a flow-on impact for wage costs and inflation.
Less investment in durable working capital over the first three months of the year “means labour productivity growth will remain weak and points to further inflation in unit labour costs”, CommSec chief economist Ryan Felsman said.
RBA governor Michele Bullock has singled out tight labour market conditions as a risk to the bank’s goal of getting inflation under control, as rising wage costs could get passed onto prices of goods and services.
Monthly trimmed mean inflation – which provides a less volatile read of prices than the headline figure – ticked up from 2.7 per cent to 2.8 per cent in the 12 months to April, data released on Wednesday showed.
The Reserve Bank forecasts the trimmed mean to fall to 2.6 per cent by the middle of 2025 and stay there for the foreseeable future.
But that is partly predicated on the RBA’s belief declining labour productivity will rebound to grow more than one per cent by the end of 2025, which would defy the experience of the past decade and more.
Speaking to media following the bank’s board meeting last week, Ms Bullock said the RBA would have to adjust its forecasts if the ambitious productivity prediction did not come to fruition.
“There’s a great deal of uncertainty about productivity,” she said.
“I can’t tell you what’s going to turn it around.”
Ms Mousina said weak productivity growth would worry the RBA but other indicators such as unit labour costs and the wage price index would factor into its decision-making around interest rates.
Treasurer Jim Chalmers says getting productivity moving again will be his primary priority in this term of government.
But he warned the decades-long issue would take more than a few years to fix.
It would take more than just attracting increased business investment, Ms Mousina said.
Governments also need to prioritise the right kind of investment that would have the greatest benefit to productivity, given the limited resources available.
“So it’s really doing the analysis around the particular projects and knowing where the weak spots are in the economy,” she told AAP.
“Like, for example, we know that in regional centres we need more infrastructure investment to connect the regions with the capital cities.”
CBA economists Belinda Allen and Lucinda Jerogin expect small lifts in business investment in 2025-26 but uncertainty caused by Donald Trump’s trade war make it harder to get a good read.
Discouragingly, businesses are not signalling plans for large growth in investment.
“The capital stock needs to grow to improve productivity for the economy,” Ms Allen and Ms Jerogin said in a research note.
“This latest data reinforces the current challenge.”
Australian Associated Press is the beating heart of Australian news. AAP is Australia’s only independent national newswire and has been delivering accurate, reliable and fast news content to the media industry, government and corporate sector for 85 years. We keep Australia informed.
