The federal treasurer and head of the central bank have singled out sluggish productivity growth as a major problem at key G20 talks.
Speaking at a meeting with other finance ministers and central bank leaders, Reserve Bank of Australia governor Philip Lowe said slow productivity growth would lead to economic and social problems.
“I agree the immediate consequence and the immediate challenge is to get inflation down,” Dr Lowe told his counterparts at the meeting.
“We really need to be successful there but I think the bigger challenge is to lift productivity growth.”
The outgoing governor, who will be replaced in the top job by his deputy when his term ends in September, has expressed concerns about anaemic productivity growth as a risk to returning inflation to target.
The governor has repeatedly pointed out that labour costs are rising too quickly because of slow productivity growth, which stalled during the pandemic as businesses went into survival mode and stopped growing and investing.
At his final G20 appearance, Dr Lowe said there were a lot of sensible ideas to kickstart productivity and politics was often the roadblock to acting on them.
“If we don’t (get these ideas through political systems), then we are condemning our citizens to slower growth in real wages, smaller public services and an increased tension on income distribution,” he said.
Treasurer Jim Chalmers stressed the importance of rebuilding economies to be more productive as they recovered from the slowdowns engineered to fight inflation.
“We need to be more ambitious than to just catch up and patch up and go back to the sorts of economies that we had before COVID-19,” Dr Chalmers said.
“That means we need to increasingly focus our coordinated efforts on how we make our economies much more productive.
“That goes to some of the issues that we need to talk about in this meeting: the energy transformation, how we adapt and adopt technology, and how we get the human capital piece right.”
The G20 finance ministers’ meeting in Gandhinagar, India, will run over two days and discussions will focus on the health of the global economy and subjects such as international tax systems and sustainable finance.
In a positive development for central banks, signs of rapidly cooling inflation suggest tightening cycles could be drawing to a close.
Market Economics economist Stephen Koukoulas said inflation was falling wherever you looked.
He said US inflation was down from its peak of about nine per cent to three per cent and China’s inflation was flat in June, in a concerning sign for the major economy.
“And then you throw in Canada and New Zealand – and even the UK, which has got some special problems but its inflation rates are falling,” Mr Koukoulas told AAP.
He said the numbers suggested supply chains had been fixed and higher monetary policy was working.
“And it’s just a matter of waiting another few months for these monthly numbers to confirm that inflation in Australia is much the same.”
Mr Koukoulas said the case for the RBA staying on hold was getting stronger especially if the incoming data continued to point in the right direction.
Before the August meeting, the central bank will get an update on the jobs market and quarterly inflation numbers.
Mr Koukoulas said the unemployment rate would have to fall back to extremely low levels of about 3.5 per cent and inflation to barely budge for the RBA to keep hiking.
ANZ economists expect the RBA to stay on hold at 4.1 per cent for the long haul after updating their prediction for interest rates.
Commonwealth Bank chief executive Matt Comyn said his group’s economists were anticipating one more hike but would be watching the incoming data.
Poppy Johnston
(Australian Associated Press)
