Senate Economics Legislation Committee, , 3:45:30 to 3:53:44
Governor Bullock discusses the impact of stagnant productivity on economic growth and the neutral cash rate.
Topics: Agricultural productivity, Employment
Speakers: Hon Matthew Canavan, Michele Bullock, Dr Sarah Hunter, Dr Christopher Kent, Unknown Speaker
Uh thank you, Chair. Uh just have some questions about productivity, thanks, Governor and others. Uh uh at your press conference after the September decision, Governor. Uh you do excuse me. Uh you commented that the bottom line is that productivity is doing uh nothing. Uh what are the economic and uh uh other consequences for inflation of productivity doing nothing?
Well, the the bottom line on that is that if productivity isn't growing, uh it's not growing not growing very fast, then the economy can't grow very fast. Demand can't grow very fast because it runs into a speed limit, I think as um as uh the deputy governor has highlighted on a number of occasions.
Uh does that mean that interest rates would be higher than otherwise if productivity was growing faster?
Um it means basically that we need to it it depends on what's happening to demand, but if demand is is um still above supply, then interest rates will need to be higher in restrictive territory to bring it back down so it's consistent with the slower growth in in um in supply. The the question about the level of interest rates is a slightly more complex one because it depends on what you think is is sort of a restrictive interest rate or a neutral interest rate, and that that's a bit more of a uh uh a complicated question.
Sure. I suppose I'm I'm asked these questions with uh uh all other things being equal frame. Um are there things that the RBA can do to influence productivity?
Um well the short answer is no, but I would say that um a economy with a high and variable inflation rate is not conducive to good decisions being made by businesses and households. So the best thing we can do for productivity is to get inflation back down to target.
And so uh you you are somewhat reliant on other parts of the Australian government adopting pro-productivity policies to help uh your task of controlling inflation.
Not just the government, Senator, the businesses also have to um step up here.
Well, again, I suppose I'm I'm uh well that that is very much the case. I'm not discussing that, but I suppose this being uh uh questioning of government in Senate estimates is uh nothing we can do directly over businesses, but of course we can get better ourselves. So my question is try to relate to the public sector here. Uh you're reliant on on other public sector agencies uh adopting policies that are pro productivity to make your job easier.
Well, if productivity can improve, then the economy can run more quickly and demand can grow more quickly without running into inflationary pressures. Um we have a productivity commission that comes up with uh that does work on productivity, that's what they do. Um they have plenty of suggestions out there for things that can be done. Um and some of and to the extent that some of that is in the regulatory space and the government can address those, then that's uh that's for them to do.
You mentioned the neutral cash rate earlier. Uh and I know there's lots of other factors that influence the neutral cash rate, but uh uh all other things being equal, uh does a lower productivity rate uh uh increase uh the neutral cash rate?
No, it's the other way around. But Chris, did you want to talk about the neutral cash rate? The neutral rate.
Yeah. I mean, if productivity uh growth is uh thought to be higher in the future, that's a signal for companies to do more investment. Uh and um, you know, that's that's something that could be moving the neutral rate higher. Um, which means monetary policy for a given cash rate is less less restrictive.
Okay.
Um that's a global phenomenon we're seeing.
Right. But obviously that's not happening here.
a heavy influence on our neutral rate is what's happening offshore because we import a lot of capital.
But then as you've said earlier, demand is higher than what we can produce. So If if our productivity was higher, we'd produce goods that match that demand, then you could it wouldn't have to increase interest rates as much. Am I missing something there?
Well, if if we didn't have excess demand, and we we had demand running more in line with um uh with supply, then we could have an interest rate which was neutral. Now, what that is that is that rate going to be um the same as it is now because the neutral rate's risen or not, I don't I don't know. Chris's point is that it does seem that because of the global investment uh boom that's happening at the moment, that investment uh globally is um outstripping savings, and that's putting up good pressure on neutral interest rates.
And if that happens, we can get back long. I'm not asking about the well, not really asking about the global investment framework. Um obviously you've mentioned and your evidence is there's excess demand in the economy. There's two ways of fixing that. Obviously, you can cut back demand or you can increase supply, that would get rid of the excess demand. Wouldn't a higher productivity rate increase the supply uh size supply curve and that would that would take pressure off interest rates. That that would that would be the case, wouldn't it? Irrespective of what's happening in global capital markets.
Yeah, so Senator, I think the the link here, um, and it this is all very uncertain, and it would really depend on how households and businesses responded. But if we had uh sustained stronger productivity growth, uh so over a number of years, what we would expect is that um that would manifest and come through in terms of stronger growth in incomes for both households and for businesses, so revenues for businesses and wages um and income flows for households, and then that might well lift their spending. So businesses would invest more potentially and households might be uh consuming more. So our living standards would be going up more quickly. Um that would be a very good outcome for everyone, obviously. Uh, but if we saw that happening, then yes, supply would be stronger, but it could also be the case that demand would be stronger. So that kind of dynamic is actually something that we're very conscious of in the context of the AI boom and what that might look like going forward from here over the next two, three, five and beyond years. Uh, if that kind of dynamic comes through, then uh that does have implications for that neutral rate um in the long run.
But we don't know that yet. Is that influencing is the AI boom influencing your cash rate decisions at the moment?
Well, in the context of business investment, which is um increased very sharply over the last 12 months, and uh a decent portion of that increase has been from the data center investment that's um at least partially related to the AI boom, it is in there.
I'm more following up on your points about it potentially letting a higher revenues and income. Is that is that that point you just raised that influence is that influencing.
No, no, no, I'm not seeing that, and that's why I was quite careful to say sustained over a number of years. We're not in that situation yet.
Look, I don't want to go around circles, I've got a lot of time, but uh yeah, I I'm obviously asking you given uh your job is to maintain uh stable inflation over the cycle. More questions about what's what's influencing your cash rate decisions, not long run um the extent that the current to the extent that the current
investment in data centres is adding to demand and demand is already above supply, then that is part of the inflationary pressures that are that are in the economy at the moment.
Um I just going I'll just move on given the time. The uh you have last year downgraded your productivity growth forecast from one to zero point seven percent. Uh what drove you to make those drown grades?