RBA reckons Australia’s economy is much smaller because of weak productivity growth

Slow productivity growth after the pandemic has shaved roughly $25 billion off Australia’s economic capacity, Reserve Bank research shows.

The poor performance was likely weighing on household incomes, RBA head of analysis Michael Plumb said on Thursday.

Mr Plumb said the research suggested “the size of the economy is a lot smaller than it would have been” because productivity growth has fallen far below the rate seen in the two decades to 2020.

The data suggests the capacity of the economy was reduced by about $25bn.

It comes as economists urge action to lift ailing productivity, with weak growth worsening the inflation fight and dampening wages for Aussies.

Better productivity means increased and improved output by companies without a need for more workers or longer hours — with the rise of machinery on farms a textbook example.

“Productivity is not about working harder, but working smarter,” Mr Plumb told a Sydney conference.

“Many of the biggest productivity improvements have come from things that have made our lives easier, like computers, robots, the internet and smartphones.”

The Productivity Commission rung the alarm on a real world example earlier this month, with Australia building about half as many homes for each hour worked compared to 30 years ago.

Mr Plumb said the poor performance across the economy reflected reduced competition, red tape, and slowing benefits from education and upskilling. He said Australian industry was becoming less dynamic and slower to adjust.

Also on Thursday, RBA deputy governor Andrew Hauser said looming global trade tensions had boosted the case for an interest rate cut earlier this month.

He said the future impact of the trade fight was unclear — but the ongoing uncertainty for businesses and households would slow growth right now.

Mr Hauser said it would be a “cooling or freezing” effect on activity.

That may have been borne out in new data from Australian Bureau of Statistics on Thursday, which showed business investment ticked down in the December quarter. Manufacturing and mining were among the hardest hit.

But he reiterated the RBA’s main reason for relief was the slowdown of inflation. He said there was potential that inflation would undershoot the 2 to 3 per cent target without a cut.

Mr Hauser said core inflation did not need to be within the target band to lower interest rates.

“It simply needs to be expected to come into the band sustainably, and to be around the midpoint over the forecast horizon,” he said.

Markets had overnight predicted just a 17 per cent chance of a rate cut at the next meeting in April.