Michele Bullock keeps wary eye on productivity

Reserve Bank governor Michele Bullock. Picture: AFP

There were no bonus points for anyone who had guessed that the Reserve Bank monetary policy board would reduce the cash rate by 25 basis points.

That the decision was unanimous – although it’s not clear what is achieved by revealing the voting record of the board – was no surprise.

The tone of the bank’s statement was more illuminating. There was talk that “uncertainty in the world remains elevated”. Reinforcing the bank’s apparent anxiety, it added: “There are uncertainties about the outlook for domestic economic activity and inflation stemming from both domestic and international developments.”

It’s clear that the bank is willing to cut the cash rate further if this is assessed to be needed to prop up the labour market, in particular, “with the cash rate assumed to follow a gradual easing path”. The likeliest endpoint is a cash rate just above 3 per cent, which is probably on the slightly expansionary side of a neutral setting.

But what is less apparent from the bank’s statement is the fundamental problem for the execution of monetary policy – the lack of productivity growth greatly impedes the achievement of the dual objective of inflation control and full employment.

Governor Michele Bullock has referred to this issue recently, pointing out that the bank is not in charge of the key determinants of productivity growth.

The statement does note that “productivity growth has not picked up and growth in unit labour costs remains high”. This is an issue because the growth of GDP is equal to the sum of the growth of productivity and the growth of working hours.

The increase in working hours growth has been aided by the rapid increase in the number of non-market/government-funded jobs – around 80 per cent of total employment growth across the past two years or so – and the expansion in the workforce caused by high net migration. Were there to be any disruption to rising total working hours – and it is possible, given budget constraints on further funding for these non-market jobs – GDP growth would very quickly fall in a heap.

Just look at Canada, which has an economy similar to ours, to see how quickly output can fall off a cliff, with a rapid rise in the unemployment rate.

No doubt Bullock will be paying close attention to the Treasurer’s productivity roundtable to be held next week, to see if any material suggestions are made to lift productivity growth and to assess the time frames before any results are seen. While she will be participating in an early session, essentially she will be there as a scene setter.

Judged by the dog’s breakfast of suggestions thus far – raising the GST, implementing a wealth tax, removing negative gearing, reducing the capital gains tax discount, a carbon tax, and the list goes on – no one, including Bullock, should be holding their breath in anticipation of any major productivity breakthroughs. Faster approvals for housing and green projects probably will be the highlight.

The reality is that the market sector increasingly has been squeezed by the rampant expansion in government spending. The fact is that productivity has been growing in the market sector but the sector has been shrinking as a proportion of the total economy.

Until the government is prepared to get out of the way and reduce government spending, the prospects for any structural recovery in productivity are gloomy. In turn, this limits the scope for the bank to fulfil its statutory objectives, with interest rates likely to be higher than would be the case were productivity growth to be closer to the long-run average of about 1.5 to 2 per cent.