The Inside Word

Interest rates vs productivity rates

Does anyone remember an occasion when there was so much attention given to NOT renewing the employment contract of a senior public servant? Dr Philip Lowe, Governor of the Reserve Bank, will complete his term on the 17th of September this year, following an extraordinary period of public media reporting and political speculation.  

For most of his time since 2016 when he started as Governor, most Australians would not have known who Dr Lowe was – he presided over six years of stable and declining interest rates until post-COVID global inflation got in the way. Twelve successive interest rate rises later, taking the cash rate from 0.1 per cent to 4.1 per cent, and life with a mortgage is now not so good; contributing sharply to cost-of-living pain for so many Australians. Hence the extraordinary and warranted focus from the 4th estate, and Dr Lowe becoming a household name. 

Congratulations to Michele Bullock who will succeed Dr Lowe as Governor, commencing her seven-year term on the 18th of September.

Contrast the attention surrounding Dr Lowe’s departure to that of Michael Brennan, Chair of the Productivity Commission. Arguably productivity is more important than mortgage rates for our future standards of living, yet a change in the head of that agency attracted very little public interest.  

The difference? Mortgage rate rises are an immediate hit to the hip pocket, whereas a declining rates of productivity growth is somewhat akin to the boiling frog analogy – you don’t feel the impact to start with, but the end result is dire. 

Whilst seriously important, productivity is hardly a thrilling topic. Arguably the Commission and successive governments have not done enough to explain the real effect our falling productivity growth will have on every Australian in the years ahead.  

Falling productivity growth means we must work longer to achieve the same standard of living – or we work the same amount, and our living standards decline.  I think the water temperature for our frog is getting very warm.

Congratulations to Chris Barrett on his appointment as the new chair of the Productivity Commission, and good luck lifting productivity growth up the priority list for governments and industry across Australia. This is desperately needed. 

Did you know?

  • Labour productivity growth across the entire economy over the last five years has been just 1% pa – much lower than the long-term average (1.5% pa annual growth rate since 1994-95) – so we are still facing the long-term trend of falling productivity growth which flows through to incomes and living standards. Growth in incomes in recent years has been mainly due to the terms of trade.
  • Labour productivity growth in the market sector (i.e., non-government) is usually much higher than for the economy as a whole – the long-term average annual growth rate for the market sector is 1.9 per cent – but it was just 1.1 per cent across 2017-18 to 2021-22. 
  • ABS measures multifactor productivity growth in the market sector. You can be excited that 2021-22 saw a surge in MFP growth (2.2%) compared to the long-term average (0.8%) or you can take the longer view and see that MFP growth in the market sector over the last five years has just been at the average 0.8% for the five years – so nothing exciting there.
  • You can speculate about what productivity will do next – the early signs are that labour productivity is falling. One possible explanation is that post-pandemic, the lower productivity firms in the services sector have reopened and low unemployment means many lower productivity workers who lost their jobs or had their hours trimmed during lockdowns are now back in full-time work. 
  • Another big change is that 2021-22 saw, for only the second time on record, a fall in the capital/labour ratio. In effect, capital investment is contributing less to productivity growth. 
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