‘Implications for wages growth’: RBA says Australia must fix one problem

Australians are tipped to be paid less and the nation’s overall economic growth is tipped to slow as one key problem continues to drag on the economy.

RBA assistant governor Sarah Hunter has warned falling productivity will impact how much of a pay bump Australians can get.

“It does have implications for the outlook for wages growth,” Ms Hunter said, speaking at the Citi Australia and New Zealand Investment Conference

“Ultimately, productivity growth is the determinant of sustainable real wages growth, as it allows nominal wages to increase without leading to a build-up in inflationary pressure.”

Ms Hunter’s warning comes as the central bank says productivity will slow to just 0.7 per cent a year, down from the bank’s previous forecasts of 1 per cent a year.

She said pay packets usually follow a 2.5 plus productivity rule, with falling productivity meaning wages will also need to come down as to not stoke inflation.

The RBA now forecasts wages can grow by as much as 3.2 per cent, down from 3.5 per cent at the start of the year.

Ms Hunter added wages could play catch up over the short term without having an impact on inflation.

“It’s important to note that this does not suggest that wages growth that is above these levels for a period will necessarily drive up inflation, or preclude a period of real wage ‘catch-up’ that allows workers to recoup previous declines in real wages,” she said.

Ms Hunter’s comments come after the RBA board moved to hold interest rates at 3.60 per cent in September, citing fears of rising inflation.

“This may suggest that the labour market, and economic conditions more generally, remain a bit tighter than we had assessed,” she said.

“At the same time, employment growth has slowed by slightly more than we previously expected, and uncertainty about the global outlook remains elevated.”

In her speech, the RBA economist also warned of the impact of slowing productivity on the overall economy, while stating a lack of competition among major businesses could be setting the nation back by as much as 3 per cent.

The RBA previously warned the slump in productivity came at the same time as a lack of competition in business, costing every Aussie about $3000.

In the June quarter GDP grew by 1.8 per cent with Ms Hunter warning this “would have seemed slow in the past”.

But she says this is more in line with expectations given the lower medium-term potential of the economy.

“The downgrade to our productivity growth assumption has important implications for our assessment of the pace of growth that can be sustained without generating inflationary pressures,” Ms Hunter said.

“Specifically, our new assumption implies that over the medium term, potential output is expected to grow at around 2 per cent per year, rather than around 2.25 per cent. This is slower than the pace seen in earlier decades, when both population and productivity growth were stronger.”