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RBA’s Lowe Says Productivity Gains Needed to Boost Incomes

RBA Deputy Governor Philip Lowe
Philip Lowe, deputy governor of the Reserve Bank of Australia. Photographer: Ian Waldie/Bloomberg

Australian businesses need to boost efficiency to maintain growth in living standards and could use engineers freed up from mining construction to build more infrastructure, central bank Deputy Governor Philip Lowe said.

“We can no longer depend on a rising terms of trade and favorable demographics to make us richer,” Lowe said in the text of a speech to be delivered in Sydney. “If this lift in productivity growth does not take place, then we will need to adjust to some combination of slower growth in real wages, slower growth in profits, smaller gains in asset prices and slower growth in government revenues and services –- in short, slower growth in our average living standard.”

Lowe’s comments echo Treasury’s top economic forecaster David Gruen, who said Australia should brace for the weakest income growth in half a century in the coming 10 years. Gruen said Nov. 21 that to maintain recent income growth levels would require labor productivity growth to average 3.2 percent a year for a decade -- something never achieved before.

The Reserve Bank of Australia has cut the nation’s benchmark interest rate to a record-low 2.5 percent as it tries to rebalance growth away from mining investment and toward industries like manufacturing, residential construction and services. That transition has been hampered by the sustained strength of the Australian dollar. Lowe today reiterated the central bank remains open minded on market action to affect the currency’s level.

Not Ruled Out

“We don’t rule intervention in or out, that’s been a long-standing practice,” he said in response to an audience question. “In the past, we have been prepared to intervene in the currency market when it’s clear the currency was misaligned or the market wasn’t working well. The threshold for intervention though is fairly high.”

The Australian dollar swung on Lowe’s comments, and traded at 91.87 U.S. cents at 11:06 a.m. in Sydney.

“Monetary policy can make a contribution by keeping inflation low and stable so that people can make decisions without having to worry about the distorting effects of high and variable inflation,” he said in the speech. “Our medium-term inflation targeting framework -- which has been in place for two decades now -- has achieved this and we are committed to making sure that we continue to deliver.”

Lowe said that productivity will receive a boost as the nation’s mining boom moves from the employment-intensive construction phase to exports that require fewer workers.

‘Necessary Rebalancing’

“This creates an opportunity for infrastructure investment to rise as a share of GDP without putting undue pressure on domestic capacity,” Lowe said. “Such a rise could assist in the necessary rebalancing of the economy and help create the basis for a further boost to our national productivity.”

The RBA’s No. 2 official said infrastructure financing “will be one of Australia’s priorities” when it chairs the Group of 20 next year. Generating political support for changes “that are in the national interest but may disadvantage some sections of the community” is critical, he said. The country is “falling short” in areas of infrastructure including transport, Lowe said.

Australia’s currency climbed almost 50 percent in the four years ended Dec. 31 as the nation escaped the 2009 global recession and a China-led commodities-investment boom spurred growth. That squeezed manufacturers and tourism operators in Australia’s southeast, spurring job losses at companies including Ford Motor Co., which said in May it would end production in the country after nine decades.

Lowe said there had been some benefits to productivity from the tighter conditions. “Many firms that we talk with -- particularly those affected by the high exchange rate -- report that they have made serious efforts over recent years to make their operations more efficient,” he said.

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