Sort of like the "lucky" country
Assistant Governor Philip Lowe told a conference in Sydney that productivity growth had slowed to a crawl, halving from more than 2 per cent per year in the 1990s to a little over 1 per cent - despite a boost investment that would typically be expected to boost output per worker."
"Normally slower rates of productivity growth lead to slower increases in living standards," he told the conference. "But this has not occurred. Indeed, growth in income per hour worked has been unusually strong."
The answer to the mystery was extraordinarily high export prices, which were pushing up income regardless, something that would not continue.
"With the proceeds of a tonne of iron ore we now can buy more LCD TVs and domestic services than we could a decade ago," he said. "This has allowed our living standards to increase at a faster pace than if we had to rely on productivity growth alone. Looking forward, this situation cannot continue indefinitely."
Australia's near record commodity prices were likely to fall in the next few years taking living standards with them unless productivity growth returned.
Australia was more dependent than ever on the performance of China and would probably soon be more dependent than ever on the performance of India...
"It would be unrealistic to assume that the growth paths in these countries will be without bumps, perhaps large ones," Dr Lowe said. "These bumps will have an impact upon Australia, and there is always the possibility of new technologies reducing the demand for our main resource exports. There is very little we can do about these risks."
Making Australia more vulnerable was that it was already near full employment, using almost all of the available workers.
"For the next year I think we’ll be travelling along pretty much close to full capacity, but probably just a little under it," said the Assistant Governor. "My judgment would be we're almost at what would be considered full employment."
A newfound reticence to spend and borrow was to be welcomed.
"Despite the considerable optimism about the future, household spending has been relatively restrained over the past couple of years and the appetite for debt has declined," Dr Lowe said.
"One interpretation is that the household sector, after having increased its debt levels for many years and witnessed the problems elsewhere in the world, has a better appreciation of the risks."
The reticence would provide "some insurance against the possibility that things do not work out as well as expected".
Australia's minority government was not a cause for concern.
"I don't think it is particularly important,'' Dr Lowe said in answer to a question. "The investment that is taking place in the resources sector is really motivated by long term growth in Asia. Most of it has a horizon of decades."
The Reserve Bank decided at its September to keep interest rates steady noting that for the moment inflation was within its target band.
Published in today's SMH and Age
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