A leading global fund manager warns there will be no quick fix for Australia’s productivity slump, saying politicians will face rising pressure to enact difficult reforms as the Reserve Bank of Australia cannot single-handedly address longer-term challenges to growth through low interest rates.
Fidelity International cross asset specialist Anthony Doyle said short federal election cycles had stymied the willingness of governments to make tough short-term decisions.
The fact that Australia has such low interest rates despite 28 years of growth was a sign that “something has gone wrong with the Australian economy”.
“I think that the RBA is now alluding to it, quite vocally, asking for the fiscal lever to be pulled in the Australian economy,” Mr Doyle said.
“This is a function of chronic underinvestment in the supply side of the Australian economy for over a decade.
“It would be a long-term fix for the Australian economy to start to improve the supply side of the economy, to improve the productive capacity, to start to embark upon cutting red tape and structural reforms.”
The call for more reforms came after Australia’s productivity growth fell to its lowest level in at least 25 years, a concern for policy makers given productivity growth, coupled with population growth, are the key drivers of long-term economic growth.
Australia’s labour productivity fell 0.2 per cent in fiscal 2019, or 0.8 per cent when adjusted for the quality of work performed. Multifactor productivity, which includes labour and capital, fell 0.4 per cent – the first decline since 2011.
Mr Doyle said the short nature of Australian federal elections hindered a longer-term focus on implementing growth-enhancing reforms, noting the United Kingdom had five year fixed-term parliaments.
“What’s the stimulus to make those really tough policy choices which will potentially have some downside in the short term but pay off in the long term?” he said.
But with the ability of monetary policy to boost growth waning as rates fall close to zero, or even negative in some countries, there was a growing acknowledgement that governments needed to step up and invest to underwrite longer-term growth.
“Across the globe monetary policy has been the only policy instrument to pull,” Mr Doyle said.
“As we’ve seen in these other economies that have been at these levels for a decade or more, fiscal starts to become more important and the pressure grows on the fiscal supply side to enact reforms to support growth in a globalised economy.”
The comments came as the RBA held rates at 0.75 per cent at its final meeting of the year.
It has been the most active year for monetary policy since 2012, with the RBA cutting rates three times.
Mr Doyle said the RBA was right to have cut rates aggressively after it made a “policy mistake” by keeping rates too high for too long.
He said monetary policy was still potent in Australia – despite the run of downbeat economic data – and the recent bounce in house prices will feed into higher consumption.
“It’s undeniable that data at the moment is soft and it will take time for the transmission mechanism of monetary policy and lower interest rates to flow through this economy.”
While he didn’t think the RBA should pursue quantitative easing, although it would in the absence of a better alternative, he said economists had “misread” RBA governor Philip Lowe’s recent speech on unconventional monetary policy.
“I think he was far more bullish in his speech and I think he was trying to get the message out that we’re a long way from quantitative easing,” Mr Doyle said.
Investors should not rule out negative rates in Australia, even though the RBA has downplayed the prospect.
“Depending on how global economies and the domestic economy performs, who’s to say they won’t go to zero or negative? Who’s to say they won’t pursue policies that we’ve seen in other regions throughout the world?”
Mr Doyle also warned that Australian investors, who have benefited from a substantial rally in stocks and bonds, wouldn’t see a repeat.
“The returns over the course of the next decade are unlikely to be anything like what we’ve seen over the past decade.”