Productivity growth revised down, as labour market cools

On Tuesday, the Reserve Bank of Australia (RBA) delivered its much-anticipated third rate cut of the year, lowering the cash rate by 25 basis points to 3.60%. After the unexpected pause in this rate cutting cycle in July, the latest quarterly inflation data confirmed that price growth was decelerating as expected and all but guaranteed Tuesday’s cash rate cut.

On the back of anticipated benign inflation data and relatively soft economic growth, Deloitte Access Economics expects interest rates to decrease further. A 25 basis point cut in December and a further reduction of 50 basis points by the end of 2026 are anticipated, consistent with the RBA’s own outlook, which assumes a reduction of 70 basis points over the same period.

Along with the cash rate decision, the RBA also delivered an updated Statement on Monetary Policy. Notably, the update showed a downward revision to assumed productivity growth over the next few years, from 1.0% to 0.7%. According to Governor Bullock, “the implications of [lower productivity growth] are already being felt... The implication of slow productivity growth is that real wages can’t grow as quickly”. 

The Governor’s remarks preceded Wednesday’s release of Wage Price Index (WPI) data from the Australian Bureau of Statistics (ABS). Overall, wage growth has remained relatively steady. The WPI increased by 0.8% over the June quarter, down marginally from 0.9% in the March quarter, leaving annual wage growth (+3.4%) unchanged. 

There were promising signs for real wage growth. Annual growth in real wages came in at 1.3% in the June quarter – the strongest result since June 2020. However, the sustainability of this growth in the absence of substantial improvements in productivity is unclear. Indeed, RBA forecasts for the WPI in the latest Statement on Monetary Policy were revised down to 2.9% over the year to December 2026 and December 2027, with real wage growth barely above zero. 

The public sector continues to experience stronger wage growth. Public sector wages rose 3.7% over the year to June, compared to 3.4% for the private sector. The public sector has led the charge for most of the last year, with annual wage growth exceeding the private sector for three of the last four quarters.

In part, this reflects public sector demand for labour, the strength of which has acted as a buffer for the labour market over recent years. The concern for the future is a question of whether the private sector can take over the reins when the influence of public sector demand on both employment and wages slips back.

On a month-to-month basis, the labour market appears relatively steady, but a longer-term view already shows signs of cooling. Today’s ABS labour force release reported a slight decrease in the unemployment rate from 4.3% in June to 4.2% in July. However, annual employment growth has decelerated from 2.6% in April to 1.8% in July.

One of the conundrums that the Australian economy faces is a current reliance on the public sector to drive activity. This is yet another reminder of Australia’s productivity challenges and underscores the importance of the Economic Reform Roundtable meetings next week. While important, the RBA controls only one lever of economic policy. Fiscal policy and the associated regulatory and tax settings implemented by governments need to do more of the heavy lifting in enabling private sector growth and productivity in Australia.

This newsletter was distributed on 14^th August 2025. For any questions/comments on this week's newsletter, please contact our authors:

This blog was co-authored by Gautham Gopinath, Graduate Economist at Deloitte Access Economics.

Click on the links below to read our previous Weekly Economic Briefings:

• Today, meet tomorrow – Australia’s Digital Pulse (07 Aug)
• Although price growth is contained, cost of living pressures remain (31 July)
• Australia falls down the World Competitiveness Rankings (24 July)
• Tariff reality starts to emerge (17 July)