Economists warn the RBA will have to push the country into recession after productivity collapsed

The fastest drop in productivity on record threatens to push the cash rate towards 5 per cent, with the PM under pressure to dump his IR reforms.

The fastest drop in productivity on record and accelerating wages growth threatens to push the cash rate towards 5 per cent, sparking demands from business for Anthony Albanese to cut red tape and abandon his industrial relations reforms.

The 4.6 per cent plunge in ­labour productivity in the year to March came as figures released by the Australian Bureau of Statistics showed economic growth slowed sharply to 0.2 per cent in the first three months of the year, with consumer spending crushed by soaring interest rates and intense cost-of-living pressures.

Amid a widening divide between the Albanese government’s drive to ignite wages growth and the central bank’s ­aggressive steps to bring inflation back under control, Reserve Bank governor Philip Lowe warned last week’s big minimum wage increase could complicate the battle to reduce inflation if it became a “quasi-benchmark” for wider pay claims.

“The longer these big increases go on, the harder it will be for wage outcomes in negotiated agreements to stay where they are,” Dr Lowe said.

“We have to face into that reality as a country (that) faster growth in nominal wages can only be supported by faster growth in productivity.”

As national accounts figures showed unit labour costs surging to 7.9 per cent in the year to March, economists warned that the additional upward pressure on inflation from unsustainable pay increases could force the RBA to hit mortgage holders with another three rate hikes to 4.85 per cent by September and push the economy into a “mild recession” in the second half of 2023.

Jim Chalmers backed in the government’s vocal support for big pay rises for the lowest-paid workers. “Rates went up yesterday not because of the budget, not because people on the minimum wage are getting paid too much, but because these inflationary pressures in our economy are more persistent than we would like,” the Treasurer said.

He refused to lay the blame for the country’s dismal productivity performance through the pandemic on the booming trend to work from home, saying “we’ve got a productivity challenge in our economy which predated work from home”.

“That’s why such a big part of our economic agenda is investing in productivity; not by trying to make people work longer for less, but by investing in their skills and their capacity to adopt and adapt technology and to get the energy mix right in our economy,” he said. “If we do those things, we can shift the needle on productivity, but it won’t happen quickly. This challenge has been developing in our economy for some time, and it will take some time to turn it around as well.”

Amid a business-led campaign against Labor’s “same job, same pay” industrial relations reform, Minerals Council of Australia chief Tania Constable said “the fall in productivity … proves why we need a singular focus on measures to lift productivity, not impose ­further red tape and restriction in the workplace”.

Australian Chamber of Commerce and Industry chief of policy and advocacy David Alexander said: “The Productivity Commission has pointed to the centrality of flexibility as a key part of productivity, but worryingly we see the government making the system more inflexible through multi-employer bargaining and ‘same job, same pay’ changes.”

But ACTU secretary Sally McManus said “workers are bearing the brunt of inflation and the increasing interest rates”.

“The fact that the business lobby and the Liberal opposition are blaming low-paid workers for inflation is not only lazy, it’s cruel and ideological,” Ms McManus said.

The ABS figures showed real GDP expanded by 0.2 per cent in the March quarter, down from 0.6 per cent in the previous quarter.

Growth in annual terms decelerated to 2.3 per cent from 2.6 per cent, according to the seasonally adjusted data.

Output on a per capita basis fell by 0.3 per cent in the quarter.

The consensus forecast had been for a 0.3 per cent quarterly lift in real GDP, and it was the weakest three-monthly rate of growth since Covid-19 lockdowns in the September quarter of 2021, the ABS said.

Dr Chalmers said moderating growth did not come as a surprise.

“The numbers confirm what Australians already know – that household budgets are under pressure from rising interest rates and higher cost of living,” he said.

Even as the economy stumbled, there was bad news for the RBA after unit labour costs – a key measure of pay pressures highlighted repeatedly by Dr Lowe over recent weeks – lifted from 6.9 per cent in the year to December to 7.9 per cent in March, the seasonally adjusted figures showed.

Speaking at a conference in Sydney on Wednesday, the central bank governor defended the past year’s 12 interest rate rises, saying the pain today was necessary to avoid the even greater pain of removing entrenched inflation from the system later.

Dr Lowe said it was “still possible” to tame price pressures without crashing the economy.

“But it is a narrow path and likely to be a bumpy one, with risks on both sides,” he said.

However, ANZ senior economist Felicity Emmett said the mix of slowing growth and stubbornly high price pressures meant “it is looking more and more difficult for the RBA to bring inflation back into the target band within that ‘reasonable time frame’ without a relatively sharp slowdown in growth and a higher unemployment rate peak than we had been factoring”.

Capital Economics head of Asia-Pacific Marcel Thieliant said that after Dr Lowe’s more “hawkish rhetoric” and the further acceleration in labour costs, he now anticipated that the cash rate would climb to 4.85 per cent by September.

“That aggressive monetary tightening will push the Australian economy into a mild recession in the second half of the year,” Mr Thieliant said.

Household disposable income lifted firmly in the quarter as more Australians got jobs, worked more hours and received pay rises. But this was eclipsed by 7 per cent inflation, leaving real income down nearly 5 per cent on a year earlier.

The national accounts figures also showed mortgage interest expenses in the March quarter were more than double than in the same period in 2022.

Against this challenging backdrop for many Australians, growth in household spending remained positive – lifting by 0.2 per cent and contributing 0.1 percentage points to growth.

But consumption growth was sharply slower than the previous period, as households reined in shopping and spent 1 per cent less on discretionary items than in the previous quarter.

With family budgets coming under increased pressure, Australians also saved a smaller share of their incomes to help pay for consumption.

The household saving ratio dropped to its lowest since mid-2008, falling from 4.4 per cent in December, to 3.7 per cent in the latest numbers. The savings ratio reached as high as 24 per cent in the 2020 lockdowns, and spiked again to 19 per cent during Delta.

Infrastructure building and spending on other capital works and machinery and equipment – in the private and public sectors – bolstered activity at the start of the year, adding 0.4 percentage points to GDP, the ABS data showed.