RBA deputy governor Philip Lowe was speaking at the CFA Institute Australia Investment Conference in Sydney today on the topic of “Fundamentals and Flexibility”. In his speech, Lowe neatly summarised the recent trend in Australia’s productivity and income which, although not so good, still give Australia a solid base on which to build the future.
The recent past
Lowe focused on three measures of productivity and income to set the scene and give some context to the debate about where Australia sits and what the future holds.
- The green line shows output per hour worked. This is the conventional measure of labour productivity.
- The orange line shows real income per hour worked…over the 2000s, our real income increased much more quickly than our output owing to the large increase in our terms of trade. We became much better off as a nation because the prices of the goods that we were selling to the rest of the world increased quicker than the prices of the goods that we were buying from the rest of the world.
- The blue line shows real income, not per hour worked, but per person in Australia. This is probably the best measure of how average living standards have progressed through time: it takes into account the lift in productivity, changes in the relative prices of our exports and imports, and changes in the share of the population that is in paid employment. It is the strongest of the three lines shown here. This reflects the fact that over the past two decades or so there has been a substantial increase in the share of the population in paid employment; between 1993 and 2008, this share rose by 7 percentage points to over 50 per cent. This rise is accounted for by three trends: a decline in the unemployment rate, a rise in the participation rate and a decline in the share of children in the population
Lowe said the recent deterioration in the trend means “the story, over recent years, is a less positive one,” than the strong run Australia experienced in the 15 years previous. That’s meant “there has been very little growth in real income per capita since 2008,” Lowe said.
This, he said “lies at the heart of some of the recent soul searching about the future of the Australian economy,” which is becoming evident in the “increasing number of people asking what comes next.
What comes after the resources boom? Where will future growth in our living standards come from? Where will the jobs of the future be?”
Lowe said these are excellent questions and highlighted that that it is unlikely that “growth in our living standards will again come from a sustained lift in our terms of trade”. But, he also added the context that even after the big falls of recent times the terms of trade is still high historically.
He also said Australia is unlikely to “a repeat of the large increase in the share of the population in paid employment”.
That sounds a little gloomy given it only leaves productivity as the alternative source of growth. But Lowe said “this is where our fundamentals matter” and even though he has discussed them at length previously, five key fundamentals matter to the outlook.
The first is our strong institutional framework, including: the rule of law, respect for property rights, a well-functioning public administration and a well-established regulatory system. We can sometimes take these things for granted but, together, they form the bedrock upon which our high-income economy is built.
The second is our people. Our education system ranks reasonably highly by global standards. Australians generally have a ‘can do’ mentality and we have a demonstrated capability to adjust to a changing world. We adopt new technologies relatively quickly and many of us are prepared to take a risk. And we have successfully drawn people from all around the world to our shores, with more than 40 per cent of our population having been born overseas or having at least one parent who was born overseas.
The third is our tremendous base of mineral resources. Australia is fortunate to have some of the biggest and best-quality resource deposits on the planet. While the resources industry goes through large cycles, our resources continue to be in strong demand from the rest of the world. The export receipts from these resources effectively pay for many of the imports that we buy; over recent times these receipts have been equivalent to around half of Australia’s annual import bill.
The fourth is our agricultural assets. As average incomes in Asia grow, so too does the demand for protein. Higher incomes also mean that there is a greater preparedness and ability to pay a premium price for high-quality, clean food. With our large tracts of agricultural land and the expertise built up from using that land over many decades, Australia has obvious advantages here.
And the fifth is our links with Asia and our expertise in delivering high-quality services. Over recent years, the focus has been very much on our relationship with China. This focus is likely to continue. But there are also significant opportunities elsewhere, including in Indonesia and India with their very large populations. Many of these opportunities lie in the services part of the economy, including in tourism, finance, education and professional services.
Later in his speech Lowe highlights the need for the economy and those of us, businesses and consumers, who reside in it to remain adaptive and flexible. But the five factors Lowe highlights are, he says, a combination of fundamentals which “should provide us with confidence that we can continue to experience advances in our living standards”.
“It is a combination of fundamentals that few other countries enjoy,” he said.