👉 Background: The Reserve Bank of Australia is essentially the Admin of Australia’s economy group-chat. The board members sit 8 times per year to check in on Australia’s economy, unemployment rate and inflation to make a call on the cash rate. Last month, when the financial markets predicted a 97% chance of a cash rate cut, the RBA surprised us all… with a pause.

‍👉 What happened: This month, the RBA has cut the cash rate by 0.25%, which means the cash rate is now sitting at 3.60%. And this news got the sharemarket very excited, especially because the RBA governor, Michele Bullock, hinted at more cash rate cuts later this year.

‍👉 What else: But before we all start partying, there was a bit of a mood killer in post-cash-rate-cut-commentary: productivity. The RBA now thinks productivity will grow just 0.7% per annum, which is down from its previous assumption of 1% annual growth.

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‍What's the key learning?

‍💡Productivity growth measures how efficiently an economy can produce goods and services over time. It's goal is to get more output from the same amount of work through better skills, smarter processes and improved technology.

💡Productivity growth is important for an economy because it can help living standards improve over time. If each worker can produce more without working longer hours, then wages can rise without causing extra inflation. On the other hand, when there is weak productivity, it means the economy’s “potential output” is lower.

💡While the RBA’s downgrade from 1% to 0.7% growth might sound small, this compounds over years… and makes a big difference. So without strong productivity growth, economies can struggles to get more prosperous, even if everyone’s working just as hard.