Australia’s Productivity Performance and Real Incomes

In the medium to long run, the growth of real income depends largely on productivity growth. Australia’s trend productivity growth declined noticeably in the 2000s compared with the period of strong growth in the 1990s. However, the effect of the decline in productivity growth on per capita real income growth has been offset by the boost to incomes from a rise in the terms of trade. Much of the moderation in productivity growth can be attributed to a decline in the level of productivity in the mining and utilities industries. Nevertheless, there has also been a broad-based slowdown across other industries. The fall in mining productivity is largely a consequence of strong global demand, and the effect on income has been offset by high prices for resources. In contrast, the weakness in productivity growth outside of the mining industry has imposed a cost on the domestic economy, in part through higher non-tradables prices. With the terms of trade likely to ease over the next few years, real income growth will slow unless there is a pick-up in productivity growth. For inflation to remain consistent with the Bank’s target this will also imply a slowing in the pace of growth in nominal factor incomes.