Australia’s economy is under renewed scrutiny as weak productivity growth has become a focal point of concern among central bankers, economists and fiscal authorities, who argue that subdued output per hour worked is now a significant contributor to persistent inflationary pressure.

Recent statements from senior officials at the Reserve Bank of Australia and analysis by international institutions highlight the interplay between productivity stagnation and price pressures, deepening debate on the country’s economic trajectory.

Data compiled by the Reserve Bank shows that labour productivity across much of the economy has fallen in recent quarters, with non-farm productivity contracting and remaining around levels seen several years ago.

The bank noted that unit labour costs have risen as weaker productivity growth has coincided with stronger earnings growth, underscoring the challenge of balancing price stability with a tight labour market and robust employment.

Weak productivity limits the economy’s supply capacity, narrowing the gap between what households and businesses demand and what firms can efficiently produce, a dynamic that can allow inflation to persist even as interest rates remain high.

Reserve Bank officials have drawn a direct connection between Australia’s productivity performance and inflation outcomes, with the deputy governor warning that bottlenecks in supply and output capacity may “hold back” the economy much like a racehorse constrained by hurdles, reinforcing the central bank’s commitment to doing what is necessary to bring inflation back toward target levels.

Economists point to long-term structural issues underpinning Australia’s productivity malaise.

Official research indicates that productivity growth has been subdued for more than a decade, with labour productivity barely higher than in the mid-2010s once short-term pandemic distortions are accounted for.

Persistent factors such as slower capital deepening, low investment in technology and equipment relative to labour growth, and subdued multifactor productivity have weighed on productive capacity.

These trends have been exacerbated by weak business investment, which has failed to keep pace with employment growth, leaving workers with less capital per worker than in previous decades.

International bodies such as the International Monetary Fund have acknowledged Australia’s relatively strong economic performance overall, but also highlighted that weak productivity growth has dampened supply capacity and could impede efforts to sustain real wages and living standards over the medium term.

The IMF noted that moderating inflation will require addressing structural supply constraints alongside conventional monetary policy tools.

Policy discussions in Canberra and business circles increasingly emphasize the need for deeper reforms to boost productivity, encompassing measures to foster innovation, enhance competition, and incentivize private investment.

As Australia’s policymakers grapple with the dual challenge of controlling inflation and lifting living standards, productivity growth is emerging as a central determinant of the nation’s long-term economic resilience and prosperity.