Reserve Bank offers a VERY bleak prediction about Australia’s future

The Reserve Bank has painted a bleak picture of Australia’s economic future in Michele Bullock’s first week as governor, including a warning of high inflation if workers are not more productive.

Australia is already in a per capita recession, with output per individual in decline for two consecutive quarters – something that last happened in 2020 during the Covid lockdowns.

Productivity is also declining: gross domestic product per hour fell in four of the past five quarters.

A decline in productivity while wages rise means costs are passed on to consumers, leading to higher inflation.

A Reserve Bank paper released on Friday raised concerns that poor productivity would hurt Australian consumers, who have already faced 12 interest rate hikes since May 2022.

“Unit labor costs have risen sharply recently, reflecting higher nominal wage growth and subdued productivity growth,” the report said.

“If this strong growth in unit labor costs continues, it would contribute to ongoing inflationary pressures.”

Inflation has moderated to 4.9 percent, but still remains well above the Reserve Bank’s target of 2 to 3 percent.

The Reserve Bank expects it to remain above the target range until June 2025, but report authors Angelina Bruno, Jessica Dunphy and Fiona Georgiakakis warned that inflation could remain higher for longer if productivity does not improve.

“Currently, wage growth forecasts are consistent with inflation returning to the Reserve Bank’s target range if productivity growth returns to pre-pandemic trends,” they said.

“Recent productivity results have been weaker than this and continued weakness is a key risk to the economic outlook.”

Average productivity growth has remained below 1 percent over the past decade, a level well below the 2 percent of the 1990s.

But since the pandemic, productivity growth has deteriorated even further, contracting 3.6 per cent in the year to June, with National Accounts data showing the first per capita recession since Covid lockdowns of 2020.

The RBA paper also suggested Australian businesses should adopt new technology as an aging workforce struggled to be productive.

“Some international studies suggest that labor productivity declines as the share of older workers increases, reflecting lower levels of innovation, entrepreneurship and adoption of new technologies,” they said.

‘However, Australian entrepreneurs tend to be older than in other advanced economies.

‘In addition, the aging of the population is likely to put pressure on labor supply and increase the incentive for companies to adopt new labour-saving techniques, which will have a compensating effect.’

But another Reserve Bank article by Kim Nguyen and Jonathan Hambur, also published Friday, says productivity is benefiting from new “generic” technology, including artificial intelligence and cloud-based software. would take years.

“This suggests that some of the initial optimism that the pandemic could lead to continued increases in digital adoption and productivity growth may be overstated,” the report said.

A Reserve Bank paper released on Friday raised fears that poor productivity would hurt Australian consumers, who have already faced 12 interest rate hikes since May 2022 (pictured is a traffic controller in Sydney)

The report’s authors said early adoption of new technology at the start of the Covid pandemic was ‘short-lived’.

“The share of companies adopting cloud-related technologies has risen sharply during the Covid-19 pandemic,” they say.

“However, the rate quickly reversed, indicating that this was a temporary increase in adoption rates and… not a change in the long-term trend.”

They analyzed the annual reports and earnings calls of companies listed on the Australian Securities Exchange.