Australia: Changing growth potential – NAB

Research Team at NAB, suggests that the potential growth in Australia is now estimated at approximately 2½% (previously thought to be around3¼%), below recent estimates from the Treasury and the RBA (≈ 2¾%), but closer to IMF estimates.

Key Quotes

“Productivity growth has slowed noticeably in Australia since the 1990s. However, the negative impact on potential growth and national income has been postponed by the (temporary) offsetting effects of the mining boom. With those offsets now unwinding, if nothing else fills the gap, Australia may experience its worst decade of national income growth (and potentially deterioration in living standards) in nearly half a century.

Expected trends in population growth and investment suggest resurgence in productivity growth will be the only answer.

To return to previous average rates of growth, productivity growth would need to pick up to 1½% from ¾%currently. Unfortunately, productivity has slowed globally (pointing to complex structural factors) and without an unexpected technological advancement or significant progress on the reform front, raising productivity growth will be challenging.

We also note that NAB’s research on innovation provides encouraging signs that business – particularly small business is working hard to lift productivity and efficiency.

The implications of lower potential for monetary policy are mixed. It implies that the output gap is smaller than previously thought, suggesting a need for tighter monetary policy at this point in the cycle should inflation pressures develop more quickly (not a concern at present given the global disinflationary backdrop).

Lower growth potential can also have an impact on fiscal policy. Previous modelling work undertaken by Federal Treasury suggested that a 25bp fall in potential growth would subtract around $9 billion from the underlying cash balance over four years.”