URGENT UPDATE: The Reserve Bank of Australia (RBA) has just announced a significant downgrade to its productivity forecasts, impacting the nation’s economic outlook. In a release accompanying the decision to cut interest rates to 3.6%, the RBA acknowledged consistent misjudgments regarding productivity growth, now projecting a decline of 0.3 percentage points in living standards.
The central bank’s revised assessments reveal that it now expects Australia’s medium-term productivity growth to taper from 1% to 0.7%. This adjustment is critical as productivity directly influences economic growth and household living standards. As a result, the RBA has lowered its projections for labour productivity, now anticipating only a 0.7% increase by the end of 2027, following a 0.7% decline over the past year.
In a candid statement, RBA staff remarked,
“For some time, our forecasts have implicitly assumed that productivity growth was temporarily weak and would gradually return to, and be sustained at, higher historical growth rates.”
They admitted that these assumptions have often proven incorrect, leading to overestimations of actual productivity outcomes.
This downgrade aligns the RBA more closely with other Australian financial institutions. The NSW Treasury, for instance, has recently revised its long-term growth assumption to 0.8%. This recalibration comes as Treasurer Jim Chalmers prepares for a productivity roundtable next week, gathering experts, business leaders, and unions to explore reforms aimed at reviving Australia’s sluggish productivity growth.
While the RBA’s outlook suggests a downward revision in GDP growth, it maintains that the inflation forecast remains stable, with both trimmed mean and headline inflation expected to stabilize within the 2-3% target band by late 2027. The unemployment rate is projected to hold steady at 4.3%, close to full employment.
The RBA’s findings highlight that firms see regulation and labour availability as critical barriers to enhancing productivity. Businesses have expressed concerns over the complexity and volume of regulatory changes, particularly affecting smaller enterprises. Additionally, while technology is viewed as a key driver for productivity, some businesses indicated that it may initially require more staff for implementation, potentially delaying its benefits.
As artificial intelligence continues to evolve, many businesses expect it will ultimately streamline labour needs, especially impacting lower-skilled jobs as the workforce shifts towards more skilled roles.
Authorities stress that any policy changes arising from the upcoming summit could take years to influence productivity positively. However, the RBA insists that these changes are necessary for a more sustainable economic future.
Stay tuned for more updates as this story develops and the implications for Australia’s economy become clearer.
