Reserve Bank warns downward revision for productivity might still be too optimistic
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The news: Reserve Bank assistant governor economic Sarah Hunter has warned that despite the central bank's recent downward revision to productivity growth forecasts, the expectations might still be too optimistic.
Speaking at the Citi Australia & New Zealand Investment Conference 2025 on Wednesday morning, Hunter outlined the importance of this measure for the RBA's assessment of the economy and the uncertainties inherent in the measure.
The RBA currently expects productivity to drift back towards its 20-year average, but Hunter warned this is "no certainty". She also flagged, though, that artificial intelligence could lift productivity more than anticipated.
The numbers: Ahead of the federal government’s Economic Reform Roundtable, the Reserve Bank downgraded its medium-term productivity growth assumption to 0.7% per annum, down from 1%.
The RBA’s downgrade to its productivity growth assumption implies potential output is likely to grow at around 2% a year. Previously the forecast had been 2.25%. As the central bank things household and businesses “have already internalised the slower productivity and income growth” in recent years, the GDP growth outlook for the end of the forecast horse was decreased by 0.3 percentage points.
The context: Hunter gave a quick update on the latest data and developments in the economy more broadly, noting outcomes “have been a little stronger” than expected when forecasts were published in August. This was in-line with previous comments made by central bank officials since the September decision to keep rates on hold.
Hunter was speaking ahead of the latest labour force data, due to be released on Thursday morning, which is a critical indicator for analysts ahead of the November rate decision.
What they said: "It’s worth emphasising that this is an assumption about productivity growth for the next two years or so. It says nothing about the outlook for productivity growth over the longer term which will be shaped by a broad range of developments, including the pace of diffusion of new technologies like AI," Hunter said.
"And consistent with this shorter time horizon, we will revisit the assumption regularly over time as the outlook for productivity changes.
"Growth in living standards is of course important to the RBA. We have a mandate to support the economic welfare of the Australian people. It’s hard to argue that productivity growth is not a good outcome for the economy, given the role it plays in lifting living standards.
"But there is very little that central banks can do to directly influence productivity over the medium term, though this is an area of active research."
The source: RBA assistant governor Sarah Hunter speech
