This Is The Chart That Has The Reserve Bank Upbeat

Productivity growth

RBA deputy governor Philip Lowe was chipper today in a speech to the Australian Industry Group’s annual economics forum.

He revealed the uptick at the end of the graph above is behind his assessment of the nation’s economy. He said business were coming to terms with the dollar’s strength being a likely long-term reality – and were starting to adjust their strategy as a result. “We hear from businesses … that they are looking for improvements,” he said, “and that many are finding them”. He went on:

… the fact that it is occurring is one reason why the Reserve Bank has been tentatively optimistic for some time that productivity growth would pick-up from the low rates experienced over much of the previous decade. We are now seeing some tentative evidence of this in the aggregate productivity data (Graph 2). While these data tend to be volatile from year to year and subject to sizeable revisions, productivity growth in 2012 was better than it has been for quite some time. Of course, we cannot be sure that this will continue, but the structural changes that are now occurring mean that there are reasonable prospects for a sustained lift in productivity growth.

Productivity growth in the Australian economy has been one of the hottest domestic topics of recent years. With the RBA signalling that there may now be a “sustained lift” in output growth, it could foreshadow an end to the cycle of rate cuts that started in late 2011.

Especially as Lowe noted some straws in the wind that have signalled the cuts were having their desired effect – improving sentiment and and increasing spending.

Now, if the monetary transmission mechanism works broadly as it has in the past, then an improvement in consumer sentiment and higher asset prices should feed through, in time, to higher spending by households. There are some signs, albeit still tentative, that this is beginning to occur.

If you want some insight on the RBA’s thinking, a key metric to follow is capital expenditure beyond the mining sector.

Lowe said the Reserve would be keenly watching the trends in capital spending, which have recently shown non-mining firms expecting to increase outlay on construction equipment and machinery.

“Whether the increases will be sufficient to offset the expected lower levels of mining investment is something that we will be watching very carefully over the months ahead,” he said.

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