AUSTRALIA: Weak Q3 Productivity Growth Consistent With RBA Forecast

Q3 productivity fell 0.4% q/q to be down 0.7% y/y after -0.9% q/q and +1.1% y/y, consistent with the RBA’s November forecast of -1% y/y in Q4 2024. Governor Bullock has said that the focus shouldn’t be on each individual read but the medium-term outlook, which she remains optimistic about. However, the return to the long-term growth rate of around 1% continues to be delayed and is now unlikely until H2 2025.

• The Board noted in its November minutes that a greater slowdown in wages growth would be needed for inflation to return to target if “productivity growth does not increase as assumed”. It projects productivity growth of 1.1% in Q4 2025 and Q4 2026.
• The downward revision to the productivity outlook also resulted in the RBA’s revising down its estimate of full employment.
• With Q3 GDP rising only 0.3% q/q, the 0.8% q/q increase in hours worked meant that productivity fell on the quarter. Part of the problem is the growth in the care economy and public sector, but the RBA has said that productivity in the market economy is also soft.
• Q3 unit labour costs (ULC) rose 0.6% q/q to be up 4.3% y/y down from 5.5% y/y in Q2 and 6.7% in Q4 2023, but still elevated.
• If hours worked trend lower before returning to average by end-2025, then productivity growth should improve over the coming quarters. ULC growth would slow to around 1% before rising to around 2.5% in 2026.
• A contraction in hours worked through to mid-2025 would see a stronger productivity response based on the RBA’s November growth forecasts.

Australia productivity vs ULC y/y% with scenario