Australia’s form slump will lead to slide in living standards
The Reserve Bank kept official interest rates steady this week, caught in a monogamous moment: to have and to hold, forsaking all other monetary options. Michele Bullock and her board are unlikely to give borrowers relief until deep into next year, if at all; the central bank expects inflation, in both headline and underlying terms, to be above the 2-3 per cent target band for about another year.
The RBA’s latest forecasts have a lacklustre and low-energy mien, with GDP tipped to increase at about 2 per cent a year until the end of 2027. That’s Australia’s resting heart rate, when a growing economy is in balance, without generating inflation that would see the RBA Nine tightening the policy screws.
Three months ago, after years of missing its GDP forecasts because of misplaced optimism about the nation’s ability to produce more output from its labour and capital, the RBA downgraded its productivity growth assumption by one-third. For the next few years, in line with the 20-year average growth rate for non-farm labour productivity, it was adjusted to 0.7 per cent. Add that to 1.3 per cent annual population increases, and you end up with 2 per cent growth in the supply capacity of the economy. Walk, don’t run.
As I explained at the time, weaker productivity implies lower wage growth; which leads to softer consumer spending; which reduces returns on capital and makes it less likely for firms to invest in new technologies such as robots, artificial intelligence and computer software; which in turn will lead to less capital for each worker and lower productivity. It’s a pitiless spiral: less begets less.
We’re not the only nation in a productivity funk, as our elected representatives and officials point out. Productivity Commission chairwoman Danielle Wood told participants at the economic reform roundtable in August how the slowest productivity growth in 60 years meant generation on generation income growth has stalled.
Wood listed the causes as the rise of the services sector, a lower boost from technological change, a capital strike, lack of economic dynamism (which means how efficiently resources find their way to their most productive uses) and the end of the reform era, with less emphasis on supply-side policies.
In its quarterly statement on monetary policy, the RBA tempers its worries about how this deficiency could feed into inflation; employers and workers are adjusting, perhaps subconsciously, to this low-income mode. Hence, its forecasts show consumer prices rising above wage growth next year.
As economist Chris Richardson puts it, we are stuck with a slow-growing national pie. Australians haven’t quite woken up to what that means for future living standards. Sure, 2 per cent growth, if achieved, is better than the outlook for ageing, stagnating, failing Europe; it’s double the rate the International Monetary Fund has pencilled in next year for Germany, France and Italy, and triple the clip for Japan.
Despite all the fiscal frailties we’re locking in through loose spending and inefficient taxing (especially when state finances are factored in), our debt appears sustainable. At face value. It’s certainly not yet in the crisis zone that our rich peers confront.
But our growth game doesn’t cut it in Asia. The RBA estimates GDP will rise in our major customers (weighted by exports) by up to 3.3 per cent in coming years. Yet the buying power of our exports (or terms of trade) has dropped by 20 per cent from the peak of the post-pandemic boom that made us all richer and gave Jim Chalmers a “golden hello” in revenue.
Richardson says we became “cargo cultists, relying too much on the good news provided to national income by the rise of China” and both sides of politics for the best part of two decades failed to get much reform done that would have boosted productivity. “Now that tailwind has gone, and we’re reduced to hoping to return to old rates of increase in our living standards without any actual underpinnings to achieve those,” he says.
There are, however, new opportunities. Rather than mass lay-offs, as some fear, AI offers a potential boost to productivity and incomes. According to Wood’s roundtable presentation, uptake of these digital tools could increase labour productivity growth by 4.3 per cent across the next decade and per capita income by $4300.
So far, compared with our peers, Australia isn’t getting the transition right. A new international report, released through the Committee for Economic Development of Australia, shows our ranking in digital competitiveness has slipped from 15th to 23rd (out of 69 nations).
We’re being left behind, says CEDA, neither adequately training employees nor properly recognising international qualifications and experience. The nation’s worst result was on business agility, where we ranked 65th.
Australia continues to lag on AI uptake, with recent industry feedback revealing low levels of literacy and trust in the tools. “Put simply, we are moving further away from global excellence in the key areas that will drive future opportunity and prosperity,” CEDA chief executive Melinda Cilento says.
For a country with spectacular endowments and high expectations, 2 per cent GDP growth is unacceptable, like a Test opener with a batting average below 30. Players muddle through form slumps; eventually the hope dies and the axe falls. If we still aspire to success, we collectively need to play without fear and master the conditions.
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Australia is neither destined for the calamity of recession nor facing a dreadful stagflation, where we experience more crippling inflation and torment in the labour market. But we’re slipping into a malaise; things are a bit off, as the economy gently ticks over yet generates new price pressures, while lacking a vitality we’ve flexed in the past.