RBA governor Michele Bullock grilled over Australia’s economic future, roundtable will signal nation’s seriousness
RBA has slashed its productivity growth forecast by a third as reporters grill governor Michele Bullock about Australia's economic future ahead of next week's reform summit.
After last Tuesday’s widely anticipated cash-rate cut to 3.6 per cent, the third quarter-point easing by the RBA in six months, most reporters just wanted to ask Bullock about productivity. Why?
Simple. Jim Chalmers is convening a three-day economic reform roundtable in the cabinet room next Tuesday. Bullock is listed as the first presenter (Topic: Some perspectives on productivity trends) at the invitation-only event, speaking after opening remarks by Anthony Albanese and the Treasurer.
On cue, the central bank had also just knocked almost a third off the productivity growth assumption that underpins its baseline view on economic growth across the next few years. Productivity was mentioned 60 times by Bullock and journalists at the press conference.
Makes sense, right?
If things go to plan, inflation stays subdued and the jobless rate holds steady, borrowers will get two, maybe three more interest rate cuts. What will all this monetary stimulus from a half-dozen rate cuts deliver? A pedestrian economy, dawdling at 2 per cent all the way to the end of 2027.
Before the governor arrived at the lectern midafternoon, sequestered journalists had almost three hours to study the latest Statement on Monetary Policy.
This quarterly compendium contains fresh staff forecasts and very detailed discussions about the state of the economy, views from the bank’s outreach to business, key judgments on policy and risks to the outlook.
This edition also includes an in-depth chapter on the Drivers and Implications of Lower Productivity Growth. “As productivity growth allows us to create more from the same inputs, it makes us richer as a country and raises living standards,” the statement says.
The key take-out in the commentary is the bank’s recognition that consistently weaker-than-expected productivity growth has led the RBA to downgrade its medium-term assumption from 1 per cent to 0.7 per cent, in line with the 20-year average growth rate for non-farm labour productivity.
That wonky, technical adjustment implies slower growth in the economy’s future capacity to produce goods and services. That means lower wage growth; which leads to weaker growth in spending; which lowers returns on capital and makes it less likely for firms to invest in new technologies, like robots, AI or even software (where businesses tells the RBA in liaison that the tech giants are gouging them on price); which, in turn, will lead to less capital for each worker and lower productivity.
Chalmers said the RBA’s downgrade was not unexpected but “it really does shine a light on the productivity challenge that we have in our economy, which we’ve acknowledged”.
“It’s not a problem that emerged in our economy three years ago, it’s a problem which has been a central feature of our economy for a couple of decades now, and it will take time to turn around as well,” the Treasurer said.
Challenger chief economist Jonathan Kearns described the central bank’s lowering of the productivity assumption as an important change. It was, he said, “an admission that future growth in gross domestic product and wages is likely to be weaker, and that matters for people’s actual and perceived standard of living”.
Bullock emphasised the downgrade was an assumption about medium-term growth, not a forecast about long-run productivity. “Those semantics are really about not being seen to pass judgment on likely growth under the government’s policies,” Kearns said.
If it does turn out that way, then as Westpac chief economist Luci Ellis put it after the rates decision, “it would make a policy mistake of keeping policy too tight even more problematic”.
Private investment is already weak; so, too, GDP growth. The RBA has trimmed back its key economic forecasts, with business investment growth in the year to June 2026 slashed by two-thirds. Those estimates, and keeping inflation from falling out of the bottom of the target zone, are predicated on market pricing of two more cuts to the cash rate.
Taken together, it’s a doom spiral towards a smaller economy and a poorer Australia, but we can turn that around and that’s what the Albanese government is trying to achieve with its roundtable through fresh thinking and a momentum for change.
By the time Inquirer received the microphone (No.17 of 24 in the conga line) Bullock was over the press pack’s relentless interest in productivity. This column asked whether muddling along in the slow lane at 2 per cent growth, with weak consumption, would translate into Australians thinking the RBA was keeping interest rates too high, given productivity was hard to conceptualise.
“I think the way that we’ll be judged is whether we’ve got inflation coming down and employment is being maintained, and if we can do that I don’t think there’s any evidence we’re keeping interest rates too high,” she said.
“I want to come back – I mean, everyone – so many questions about productivity. The news here isn’t productivity. The news here is that we have – this is our third decrease in interest rates, we’ve had 75 basis points now, and that our inflation is gradually returning sustainably to the target and that the unemployment rate is remaining pretty low in an historical sense.
“That is the good news here, and so far that doesn’t suggest we’ve had interest rates too high. It suggests that we’ve managed to – well, you might remember we were in this room maybe a year ago being criticised for not taking interest rates high enough. So I think that’s the news that we should be focusing on and that’s the evidence we’ll be focusing on to see whether or not interest rates are too high.”
OK. Next up was Millie Muroi from The Sydney Morning Herald and The Age: “I’m going to be a bit annoying and ask about productivity …” Outstanding. This is not a media obsession but the main game for Australians.
Cometh the hour, cometh the champions of productivity. Of course, the RBA does not pull the levers on productivity. Its job is to keep inflation between 2 and 3 per cent and the economy at full employment with one blunt tool and a smile.
When the RBA gets this “stabilisation” right, all the other beautiful things in the economy have a better chance of happening: risk-taking, investment, home ownership, saving, job switching and higher material living standards.
Last year, the central bank was more worried about our dismal productivity performance, and said so often. Because of stagnant productivity, wage growth was leading to higher “unit labour costs” (growing at an annual 6 per cent); this is one of the main factors, especially in service industries, that causes businesses to push up their prices.
That anxiety has eased, says Ellis, with the RBA explicitly stating its new take on productivity “has no implications for inflation”.
It’s similar to how the Bank of Canada framed it last year, arguing low productivity might lead to employers resisting demands for higher pay.
“All the hand-wringing a year ago about wages growth being too fast given trend productivity growth turned out to be misplaced,” Ellis argues in a note. “The explicit assumption now is that households and businesses have (likely subconsciously) adapted to slower productivity growth, which is why wages growth is slower.”
But weaker productivity growth feeds into other problems for Canberra and provincial governments. Weaker consumer spending means a lower GST pool for the states; weaker GDP growth means fewer new jobs and a lower personal income tax take in a budget with a default to deficit, and with rising debt-interest costs.
Chalmers argues the RBA’s productivity downgrade is only for the next few years. Yet it’s a long way short of Treasury’s long-term assumption of 1.2 per cent, on which our 40-year forecasting on budget sustainability is done, as well as the 10-year fiscal trajectory.
Remember, there has been no improvement in output per hour worked since 2016, a period when the low-yielding and taxpayer-funded care economy has run rampant. What if this goes on apace? Or if we don’t find better ways to encourage business investment? Or if we don’t increase business dynamism and get a big performance boost from AI technologies?
If the RBA has been overly optimistic, or the roundtable does not lead to better growth policies and less red tape, it means lower company profits, tighter household finances, fewer new homes, a smaller economy and larger deficits and debt.
Is this the go-slow, debt-heavy and underdone Australia we want to pass on to the kids? This is not all up to the Albanese government, but leadership matters.
The coming roundtable will show quite starkly how serious we are, collectively, about getting out of our national form slump.
Michele Bullock runs monetary policy and fronts a post-meeting press conference to explain every decision on official interest rates. While the Reserve Bank governor aims to set the agenda and has a prepared story to tell her audience beyond the briefing room, she’s not in charge of the news.