A further slowdown in global trade, the cost of the transition to net zero emissions and waning business dynamism could drive down productivity growth and make Australians poorer, the Reserve Bank has warned.
Echoing recent statements by former RBA governor Philip Lowe, economists at the central bank also said yesterday that Australia would not achieve the same high rates of income and productivity growth as previous decades without another round of ambitious economic reform.
The release of the research, Recent Trends in Australian Productivity, comes as the economy is hit by the largest fall in labour productivity on record, souring the outlook for inflation and incomes.
The decline has caused alarm among economists, given productivity improvements are the main driver of higher wages and living standards over the long run. Output per hour worked, a proxy for labour productivity, has fallen 6.5 per cent since its peak in March last year, pushing productivity down to March 2016 levels.
RBA economists Angelina Bruno, Jessica Dunphy and Fiona Georgiakakis pointed to a fading appetite for sweeping economic reform as one of several reasons for lacklustre rates of productivity growth over the past decade.
“Without further economic and regulatory policy reforms, the same growth in productivity experienced in past reform decades is unlikely,” the trio said, citing research from the OECD showing elements of Australia’s regulatory landscape were excessively complex.
From the 1990s to the mid-2000s, productivity grew at an average rate of 2.1 per cent per annum, spurred on by deregulation, pro-competition policy reforms, and the uptake of new digital technologies, the RBA said.
That period included the Keating-era
“However, the global nature of the productivity slowdown suggests economies must be dealing with common shocks, not only country-specific regulatory developments,” the economists said.
Productivity accounted for more than 80 per cent of national income growth over the past 30 years, according to the Productivity Commission.
A further slowdown in global trade, which the OECD said this week had declined by 2.5 per cent in the year to June, would also weigh on future productivity growth.
“International trade increases competition, improves the reallocation of National Competition Policy, devised in response to Fred Hilmer’s sweeping review into competition in 1993.
Under the policy, states received about $600 million a year over a decade for implementing a host of important policies that limited anti-competitive behaviour and reformed the rules of the game for government-owned businesses.
Productivity growth in the decade before the pandemic was about 1.3 percentage points lower than the 1999 to 2004 period. The RBA found the finance, utilities, and manufacturing sectors recorded the biggest fall in productivity growth over this period. resources to more productive firms and reduces the costs of production by increasing the availability of intermediate inputs,” the RBA economists said.
Another key risk, they said, was the transition to net zero emissions.
“Abatement measures will generally increase production costs for firms, weighing on productivity growth.
“Over the longer term, as the benefits of these technologies are realised, the net impact on productivity may improve.”
RBA governor Michele Bullock warned last month the sheer volume of investment required to meet Australia’s target of net zero by 2050 could push inflation higher over the medium term.
While the pandemic caused an unprecedented surge in the uptake of technology, including cloud computing and software enabling remote work, the RBA researchers said it was unclear whether businesses would face the same pressure to innovate now the health crisis is over.
Businesses where board members had relevant technological backgrounds were more likely to profitably adopt new technologies.
