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Spotlight on productivity.
An unexpected rise in the unemployment rate to 4.3% in June has left analysts questioning whether the RBA made a mistake last week when it kept interest rates on hold rather than delivering the cut that markets had been pricing. But with only one month to wait until the next RBA meeting, the economic consequences of the delay are fairly limited. And with the June quarterly CPI expected to show a slowing in underlying inflation to around 2.7%, an August rate cut is almost certainly in the bag.
This week's June labour market release was unambiguously weak. The number of unemployed rose by 33k people to 660k, the highest level since pandemic lockdowns in 2021. Part-time jobs were created but were largely offset by falls in full-time jobs, leaving employment up by just 2,000 people and aggregate hours worked 0.9% lower in the month. There was also a sharp rise in youth unemployment which rose from 9.5% to 10.4% for 15-24 year olds. Youth unemployment is often seen as a leading indicator of the direction of the labour market, as younger workers are typically the first to lose their jobs in a downturn.
For some time now, we have been expecting to see a softening in labour demand as the rapid expansion of government-funded care economy employment eases pace. While industry data are not yet available for the June quarter to confirm this is the case, the data we have indicate a slowdown in the trend growth in total hours worked from 2¾% at the end of last year to 1¾% now. This slowdown in total hours worked is occurring during a period of economic recovery and rising GDP growth, which means productivity growth is finally showing signs of life.
How ironic would it be if the long-awaited cyclical recovery in productivity growth arrives just wen structural productivity reforms are finally being taken seriously?
With around a month to go until the government's Economic Reform Roundtable, submissions and public posturing from various groups are building. Topics up for discussion as nominated by the Productivity Commission include the role for AI, regulation, human capital, the care economy and tax reform. While the government seems reluctant to make changes to the GST, reforming other taxes appear to be on the agenda, including: replacing stamp duty with land taxes; reducing income tax rates as a trade-off for income tax concessions; and a road user charge to better reflect costs of road usage. Corporate tax changes to encourage investment, particularly amongst small businesses, are also on the table.
Perhaps the most surprising posturing this week was from ex-Treasury Secretary Ken Henry in his speech to the National Press Club titled "Our last, best chance". Interestingly, Dr Henry suggested that no reforms were more important than environmental law reform. For someone synonymous with tax reform (the 2010 Henry Tax Review), the nomination of reforms of the Environment Protection and Biodiversity Conservation (EPBC) Act as a priority for addressing ailing productivity was a sobering reminder of the generational impact of climate change. According to Dr Henry, “the biggest threat to future productivity growth comes from nature itself; more particularly, from its destruction.” His assessment of the EPBC Act was scathing, that it was hindering not helping, it was not only failing the environment but hampering the growth of housing and transport infrastructure, renewable energy and critical minerals and the resilience of agriculture.
Henry views EPBC reforms, which would allow a speeding up of development approvals while simultaneously protecting the environment and conserving biodiversity, as our last chance to achieve net zero emissions, and our best chance for improving productivity outcomes. In a sign that they too are fed up with the blowout in approval delays, business groups appear supportive of reform of environment laws, while the Coalition has also signalled a willingness to cooperate. Success on this front will likely also require co-ordination across all levels of government.
Dr Henry’s focus on intergenerational (in)equity was also a defining feature underpinning CBA’s submission to the productivity roundtable. According to their report, “Australian society has been built around an implicit compact: by working hard and making a contribution to Australia today, people will be better off tomorrow and pave the way to a brighter future for generations to come.” Without an improvement in productivity, “there are worrying signs that the next generation may be the first in modern history in Australia to be financially worse off than their parents – earning less, paying more, and inheriting a system under greater fiscal and social strain in a more uncertain world.” It views the three priority areas for addressing this intergenerational divide to be housing affordability, energy security and fiscal sustainability. The CBA report recommends streamlining regulation and approvals, and undertaking measures to boost technology diffusion, especially in small and medium businesses.
The first Intergenerational Report (IGR) in 2002 assumed future productivity growth of 1¾%. In the 22 years since, productivity growth has disappointed, averaging just 0.8%. Excluding the pandemic period, productivity growth has averaged close to 1%, which is below the latest IGR (2023) assumption of 1.2% productivity growth. Regardless of whether a cyclical productivity recovery is now underway, two and a half decades of weak productivity growth highlight the importance of addressing structural constraints to productivity to allow for living standards to improve.