September 2023

Australian Economy

Recent Trends in Australian Productivity

Angelina Bruno, Jessica Dunphy and Fiona Georgiakakis

Productivity growth enables rising living standards and is needed for real wages growth to be consistent with stable inflation over the medium term. Prior to the COVID-19 pandemic, productivity growth in Australia and other advanced economies had been low, because business dynamism, job mobility, global trade and policy reform all slowed. Over the past few years, the pandemic and other shocks distorted productivity outcomes. Even if these shorter term fluctuations wash out, the longer term (and apparently structural) weakness in productivity growth could persist. This would have implications for the rate of nominal wages growth that is consistent with inflation returning to the target band. This article discusses the trends in Australia’s productivity growth before, during and since the pandemic and the implications for the economic outlook.

productivity, wages, labour market, COVID-19
Australian Economy

Adoption of General-purpose Technologies (GPT) in Australia: The Role of Skills

Kim Nguyen and Jonathan Hambur

General-purpose technologies (GPT) have the potential to transform how we work, to change the skills we need and to drive productivity growth. It is therefore important to understand the conditions that lead to the successful adoption of GPT. Using a novel database on the adoption of cloud computing and artificial intelligence/machine learning by Australian-listed firms, this article finds that the COVID-19 pandemic led to a short-lived surge in adoption of cloud computing technologies. In addition, there is evidence that profitable adoption is more likely to occur in firms where the Board has members with relevant technological backgrounds, and that firms adopting GPT are more likely to seek staff with related skills. These findings highlight the importance of workers’ and managers’ skills in technology adoption, and the impact this can have on productivity growth.

business, labour market, machine learning, productivity, technology

Green and Sustainable Finance in Australia

Cameron Armour, Declan Hunt and Jeremy Lwin

Australia has committed to achieving net zero greenhouse gas emissions by 2050. This will require significant amounts of investment and financing as we move away from a carbon-intensive economy. Prior to the COVID-19 pandemic, productivity growth in Australia and other advanced economies had been low, because business dynamism, job mobility, global trade and policy reform all slowed. Over the past few years, the pandemic and other shocks distorted productivity outcomes. Even if these shorter term fluctuations wash out, the longer term (and apparently structural) weakness in productivity growth could persist. This would have implications for the rate of nominal wages growth that is consistent with inflation returning to the target band. This article discusses the trends in Australia’s productivity growth before, during and since the pandemic and the implications for the economic outlook.

bonds, climate change, financial markets, securities
Australian Economy

Economic Literacy in Australia: A First Look

Madeleine McCowage

Those who are economically literate make more informed economic choices, better understand the world around them and can influence public discourse and the actions of government. Given the importance of economic literacy for individuals and society at large, the Bank commissioned a large-scale survey of Australian adults testing their understanding of some core macroeconomic topics. The results enabled compilation of simple literacy scores that represent the Bank's first attempt to gauge economic literacy in Australia. Being male, older, of higher income, having a degree, and having studied or being engaged with economics are associated with higher scores. By contrast, persons aged 18–24 years, unemployed persons and those without a degree had the lowest scores. Questions that tested abstract macroeconomic concepts appeared more difficult than those about more relatable issues that draw on lived experience. These findings speak to the importance of simple and targeted communication by the Bank and other policymakers to support the understanding of economic concepts across the community.

education, rba survey

Recent Developments in Small Business Finance and Economic Conditions

Patrick Chan, Andre Chinnery and Peter Wallis

The economic environment has become more challenging over the past year, including for small businesses. High inflation, slower growth of demand and difficulties in finding suitable labour have contributed to declines in small business conditions and confidence. Demand for business finance has slowed, consistent with the rise in interest rates and slower growth in economic activity. Small businesses report that accessing funding through banks remains a challenge. The article considers these recent developments, drawing on the discussions of the Small Business Finance Advisory Panel and information from the Bank’s liaison program.

business, credit, finance, wages
Financial Stability

Financial Stability Risks from Commercial Real Estate

Jin Lim, Matthew McCormick, Siddarth Roche and Emma Smith

Current conditions in global commercial real estate (CRE) markets are challenging. Weak leasing demand and higher interest rates are weighing on CRE owners’ loan servicing ability and asset values. Globally, appetite to lend to CRE investors is softening and signs of financial stress are emerging especially among office owners in the United States. While CRE markets are less likely to pose risks to the banking system given improved lending standards following the global financial crisis (GFC), systemic risks are higher in jurisdictions where the banking system is more exposed to CRE, such as in the United States and Sweden. Australian CRE markets face similar challenging fundamentals, though signs of financial stress appear low at present and systemic risks are lower than in the past. This is a result of Australian banks’ reduced CRE exposures as a share of their total assets and tighter lending standards since the GFC. However, risks would increase in the event of a sharp economic downturn or if systemic risks were to spill over from overseas CRE markets.

asset quality, banking, commercial property, COVID-19,financial stability
Australian Economy

New Timely Indicators of Wages Growth

Nalini Agarwal, James Bishop, Matthew Fink, Jessica Geraghty and Yahdullah Haidari

Monitoring developments in wages is important for assessing the inflation outlook, as labour costs are a major factor in firms’ pricing decisions. Over recent years, the Reserve Bank has developed a suite of timely wages indicators based on surveys and administrative data. Together with externally developed indicators, these measures provide a fuller view on wages developments ahead of the release of official statistics. This article explains the methodology behind these indicators and what they reveal about labour costs in Australia.

labour market, wages
Financial Stability

Financial Health and Employment in the Business Sector: A Non-linear Relationship

Phil Grozinger

This article examines how increased financial stress in the business sector negatively impacts employment through the behaviour of firms. It highlights the non-linearity of the relationship between firms' financial health and employment and identifies thresholds that can serve as useful reference points when assessing the resilience of the business sector and risks to macrofinancial stability. Using data at the individual business level, this article finds that employment outcomes are significantly worse for firms with a profit margin below 5 percent or with a cash surplus (i.e. cash assets plus cash profit) of less than 10 per cent relative to sales.

business, financial stability, labour market, modelling

Reading through the Lines: Price-setting Indicators from Earnings Calls

Tomas Cokis, Callan Windsor and Max Zang

This article explores how information in earnings call transcripts from Australian firms can contribute to the Reserve Bank's understanding of their price-setting behaviour, as a complement to information gathered from the Bank's liaison program. A large language model is used to process and analyse earnings call transcripts and construct new sentiment indicators for input costs, demand, prices and supply shortages from them. These indicators, starting in 2007 and updated to capture the latest August earnings season, provide useful information about economic conditions and price-setting behaviour, including about developments during the recent period of unusually high inflation.

machine learning, modelling, technology, business, finance

Measuring Government Bond Turnover in Australia Using Austraclear Data

Cameron Armour, Leon Berkelmans and Laurence Bristow

This article provides new estimates using Austraclear data for monthly turnover ratios for Australian Government Securities (AGS) and semi-government bonds (semis). Previous Reserve Bank estimates used Austraclear data that included repo transactions, as acknowledged at the time. In November 2021 Austraclear implemented a change to reporting standards that excluded repo transactions more effectively. This change allows for more accurate estimates of turnover for AGS and semis. The new turnover estimates are considerably lower, suggesting repo activity was a significant part of the previous estimates. The new estimates, with repo transactions excluded, better align with survey data on turnover published by the Australian Office of Financial Management.

bonds, financial markets, securities

June 2023

Financial Stability

Climate Change and Financial Risk

Samuel Kurian, Geordie Reid and Maxwell Sutton

Climate change, and the actions taken in response to it, introduces both risks and opportunities for financial institutions. The Reserve Bank continues to monitor the build-up of climate-related financial stability risks, including how these risks are priced and who ultimately bears the physical and transition risks arising from climate change. Globally and in Australia, most analysis has found limited direct effects of climate risks on the financial system as a whole. Those that do arise fall unevenly, with the largest risks concentrated in specific geographic regions and sectors. Much of the analysis to date has been exploratory in nature and analytical frameworks continue to develop. This reflects, in part, the complexity of bringing together elements of climate science, economics, finance and regulation. Commonly identified areas for improvement relate to data availability and coverage, consistent disclosure requirements, and the design of scenarios used to assess climate-related risks to financial stability. Ongoing engagement and coordination between the public and private sectors, domestically and internationally, will be required to effectively monitor and ultimately manage the physical and transition risks arising from climate change.

climate change, financial markets, modelling, risk and uncertainty
Australian Economy

New Insights into the Rental Market

Fred Hanmer and Michelle Marquardt

This article draws out new insights into the private Australian rental market using a new large administrative dataset of rental properties, which is an input to the Consumer Price Index (CPI). CPI rent inflation has picked up recently. Since 2021, rents have increased across inner-city and regional areas throughout all the states. Rent increases have also become more common and larger on average – particularly for the 2–3 per cent of properties each month that have a change in tenants. This is in contrast with the experience during the COVID-19 pandemic where rents fell in many suburbs close to central business districts but increased in regional areas, driven by a preference shift among many households for more space and net population flows.

COVID-19, households, housing, inflation

Consumer Payment Behaviour in Australia

Thuong Nguyen and Benjamin Watson

The results of the Reserve Bank’s 2022 Consumer Payments Survey show that consumers continue to shift from using cash to electronic payment methods – a trend that was accelerated by the COVID-19 pandemic and consumers’ preference towards using debit and credit cards and making payments online. Consumers are also increasingly using more convenient payment methods, particularly contactless card payments, by tapping their card or phone. Cards are now used for most in-person payments, even for small transactions that used to be made mostly with cash.

money, payments, rba survey

Cash Use and Attitudes in Australia

Jack Mulqueeney and Tanya Livermore

The 2022 Consumer Payments Survey reveals that the ongoing decline in cash use in Australia has accelerated since the COVID-19 pandemic. The share of in-person transactions made with cash halved, from 32 per cent to 16 per cent, over the three years to 2022. The decline in cash use was particularly pronounced for smaller payments; cash is now used less than electronic methods for all transaction sizes. The demographic groups that traditionally used cash more frequently for payments – such as the elderly, those on lower incomes and those in regional areas – saw the largest declines in cash use. Privacy and security concerns with electronic payment methods continued to be the main reason for needing cash, while barriers to using electronic payment methods have become less important since 2019.

banknotes, money, payments, rba survey
Australian Economy

Estimating the Relative Contributions of Supply and Demand Drivers to Inflation in Australia

Ben Beckers, Jonathan Hambur and Tom Williams

Inflation has increased substantially since mid-2021. Understanding the relative contributions of supply and demand factors is important for determining the appropriate monetary policy response; a central bank may at least partly ‘look through’ the price effects of a supply shock if it is expected to be short lived and inflation expectations remain anchored. This article attempts to disentangle and explore the contributions of supply and demand factors to the recent inflationary episode, using three approaches. Similar to the experience of other advanced economies, our estimates suggest that supply-side factors have been the biggest driver of recent inflation outcomes in Australia. These supply-side factors have been persistent, with their contribution to inflation growing over 2022, leading to an extended period of inflation being above target and concerns that inflation expectations could become de-anchored. That said, demand has also played an important role.

inflation, modelling
Financial Stability

Leverage, Liquidity and Non-bank Financial Institutions: Key Lessons from Recent Market Events

Rhea Choudhary, Suchita Mathur and Peter Wallis

Non-bank financial institutions (NBFIs) can pose risks to financial stability due to their size, complexity and global interconnectedness. Vulnerabilities present in some NBFIs include high levels of leverage, liquidity mismatches and weaknesses in risk management practices. This article discusses how these vulnerabilities have been exposed in multiple episodes overseas since early 2020, resulting in dysfunction in some financial markets and losses for some NBFI counterparties. While Australian markets and institutions were largely unaffected by these episodes, regulators in Australia and overseas remain vigilant to the potential future risks posed by the sector.

central clearing, financial markets, international, liquidity, regulation

Syndicated Lending

Qiang Liu

Syndicated lending involves a group of lenders providing a single loan to one borrower. This article considers the purposes and workings of syndicated loans in the Australian market, and the advantages of this type of lending for both lenders and borrowers. It finds that syndicated loans are a significant source of funding for large Australian businesses and for borrowers with large financing needs, especially as such loans are often more accessible and flexible than public debt markets. For lenders, syndication allows them to diversify their exposures, as well as to monitor loans and negotiate covenants efficiently.

debt, banking, finance, funding
Australian Economy

Recent Developments in the Cash Market

Laurence Bristow and Calebe de Roure

Following the implementation of unconventional monetary policy measures during the COVID-19 pandemic, liquidity in the banking system rose significantly. This led to a fall in cash market activity and a decline in the cash rate to below the cash rate target. Despite the high level of liquidity – as measured by Exchange Settlement (ES) balances – some banks have continued to borrow in the cash market. Over the past year or so, this borrowing has picked up somewhat and the cash rate has risen modestly to be slightly closer to the target, largely owing to an increase in the concentration of ES balances. As the Reserve Bank’s unconventional policy measures unwind and ES balances decline, activity in the cash market is likely to increase further. The extent of any future pick-up in activity, and the level of the cash rate relative to the target, will be influenced by the distribution of ES balances across banks.

cash rate, COVID-19, financial markets, liquidity
Global Economy

Economic Developments in the South Pacific

Kelsey Wilkins

Australia has long played a significant role in the regional economy of the South Pacific. This article provides an overview of economic developments in the region, with a focus on recent shocks and medium-term growth challenges. The region’s heavy reliance on external demand meant that South Pacific economies were severely impacted by the COVID-19 pandemic and other concurrent challenges. Expansionary economic policies implemented by governments and central banks, alongside international aid and lending, supported the region through the acute phase of the pandemic. While a recovery is underway, the South Pacific will continue to face challenges to its medium-term growth and development, particularly via high debt levels and climate change.

climate change, COVID-19, international, risk and uncertainty
Global Economy

Correspondent Banking in the South Pacific

Michael Davies

Worldwide, many financial institutions make use of correspondent banking services to connect to the global financial system. This article examines the withdrawal of global financial institutions from the provision of correspondent banking services to the South Pacific and the implications for countries in the region. The available evidence suggests that South Pacific nations, like many small island economies globally, have seen a larger-than-average decline in the provision of these services. The decrease in the availability of correspondent banking services appears to be most pronounced for smaller local banks and in the major global currencies. While the available evidence suggests that South Pacific countries have been able to manage this decline thus far, the remaining correspondent banking services are becoming increasingly stretched and further withdrawal may cause financial sector disruption.

banking, international, payments

March 2023

Australian Economy

Renters, Rent Inflation and Renter Stress

Nalini Agarwal, Robert Gao and Megan Garner

Around one-third of all Australian households rent. Renter households tend to be younger, have lower incomes and less wealth than owner-occupiers. Renter households are also more likely than mortgagors to experience financial stress, although the incidence of financial stress among renter households has declined over the past decade. The rental market is tight and rents have increased more strongly of late, compared with the modest increases in average rents over the 2010s. For some renters, strong growth in incomes will have helped limit the deterioration in housing affordability, although there will be others who will struggle to afford the rent increases. This suggests that affordability will have worsened for some renters, and, in combination with other rising cost-of-living pressures, this is likely to be contributing to financial stress.

households, housing, inflation, risk and uncertainty
Financial Stability

Fixed-rate Housing Loans: Monetary Policy Transmission and Financial Stability Risks

Gian-Piero Lovicu, Jin Lim, Anthea Faferko, Amelia Gao, Anirudh Suthakar and Declan Twohig

Fixed-rate borrowing increased significantly during the COVID-19 pandemic, which has delayed the effect of the higher cash rate on borrowers’ cash flows. A key issue for the economic outlook, and by implication financial stability, relates to the ability of borrowers with fixed-rate loans to adjust to substantially higher borrowing costs when their fixed-rate mortgages expire. Borrowers with fixed-rate loans have had a considerable period to adjust their finances to prepare for the increase in their mortgage payments and many appear to have similar savings to borrowers on variable rates. However, on some metrics fixed-rate loans have higher risk characteristics than variable-rate loans. With many fixed-rate mortgages expiring in the period ahead, the Reserve Bank will continue to closely monitor the implications for household consumption and financial stability.

COVID-19, financial stability, housing, interest rates, monetary policy
Australian Economy

A New Measure of Average Household Size

Nalini Agarwal, James Bishop and Iris Day

This article introduces a new, timely measure of average household size (AHS) – a key determinant of underlying demand for housing – using the data from the ABS monthly Labour Force Survey. The average number of people living in each household has declined from around 2.9 in the mid-1980s to around 2.5 since the early 2000s. More recently, the AHS declined to historical lows of a little below 2.5 people per household. This was driven by changes in Sydney and Melbourne during the pandemic, which were more exposed to health restrictions, lockdowns and changes in migration flows from overseas.

COVID-19, households, housing
Financial Stability

Non-bank Lending in Australia and the Implications for Financial Stability

Callum Hudson, Samuel Kurian and Michelle Lewis

Non-bank lenders help to finance some forms of economic activity that might otherwise go unfinanced by traditional banks. However, as the global financial crisis demonstrated, non-bank lending activities have the potential to undermine financial stability, in part because they are less constrained by regulation. Risks to financial stability can include the amplification of credit and asset price cycles, increased competition for borrowers that prompts banks to weaken their own lending standards, and the potential of stress spilling over into the prudentially regulated financial system. Unlike in some other economies, non-bank lending accounts for a small share of total credit in the Australian economy and banks have relatively limited exposure to non-bank lenders. Non-bank lending therefore poses little systemic risk to financial stability in Australia at present. However, it has grown strongly in recent years, particularly for housing. Regulators and policymakers therefore need to continue monitoring developments in this space. This article provides a primer on non-bank lending in Australia, focusing on lending for housing and the potential risks to financial stability.

credit, financial stability, housing, lending standards, regulation

The Cash-use Cycle in Australia

Rochelle Guttmann, Tanya Livermore and Zhan Zhang

The use of cash for day-to-day transactions has been declining for many years and this has implications for all aspects of the cash system. This article illustrates the interrelationships between consumers’ use of cash for transactions, access to cash services and merchants’ acceptance of cash as a payment mechanism through a ‘cash-use cycle’. Recent data suggest that the cash-use cycle in Australia is functioning adequately at present. However, the ongoing adequacy of cash access is vulnerable to further withdrawal of access points; this issue warrants regular monitoring.

banknotes, currency, money, payments
Australian Economy

Can Wage-setting Mechanisms Affect Labour Market Reallocation and Productivity?

Jonathan Hambur

Productivity growth has slowed in Australia and overseas in recent decades, with negative implications for wages and incomes. In Australia, at least part of this slowdown reflects the fact that more productive firms have grown and attracted workers more slowly than in the past. This article considers whether the increased use of industry-wide wage agreements could help to explain this slowdown. It finds that in sectors with greater use of industry-wide agreements, the relationship between firm-level wages and productivity tends to be weaker. This weaker relationship between productivity and wages seems to feed through to firm growth, with more productive firms seemingly less likely to attract staff and grow. While many factors can affect the choice of wage-setting mechanism, these results suggest that aggregate productivity growth and living standards could be stronger when firms are incentivised and able to compete for workers.

business, labour market, productivity, wages

Bank Fees in Australia

Laura Nunn

This article updates previous Reserve Bank research on bank fees charged to Australian households, businesses and government. Over the year to June 2022, total fees charged by banks through their domestic operations were little changed from the previous reporting period. Strong growth in business credit added to fee income in the year, while overall fee income from households declined amid heightened lending competition in the housing market. Lending growth continued to outpace growth in fee earnings, and total fee income as a share of banks’ incomes decreased slightly.

banking, business, credit, fees, households

Developments in Banks' Funding Costs and Lending Rates

Vincent Carse, Anthea Faferko and Rachael Fitzpatrick

Banks’ funding costs rose over 2022, driven by increases in the cash rate and in expectations for the future path of the cash rate. In turn, lending rates have increased considerably for the first time in over a decade. The increases in the average rate charged on all outstanding loans was limited by the large share of fixed-rate housing loans and ongoing competition in housing lending. This article updates previous research published by the Reserve Bank on developments in banks’ funding costs and lending rates.

banking, cash rate, credit, funding, interest rates, monetary policy

Developments in Foreign Exchange and Over-the-counter Derivatives Markets

Cameron Armour and Jack Beardsley

This article discusses the key results from the 2022 Triennial Central Bank Survey of Foreign Exchange and Over-the-counter Derivatives Markets. Global activity in foreign exchange (FX) markets increased over the three years to April 2022, driven by increased turnover of FX swaps with short maturities and trading between dealers. The volume of FX trading activity in the Australian market also grew, although this was largely driven by increased trading between related parties. The Australian dollar was the sixth most traded currency globally, down from fifth in 2019. Turnover of over-the-counter (OTC) interest rate derivatives declined globally, reflecting the transition away from the London interbank offered rate (Libor); however, activity increased in the Australian OTC interest rate derivative market, reflecting an increase in turnover of interest rate swaps. For Australian banks, the value of OTC derivatives increased sharply, driven by interest rate and commodity derivatives.

currency, financial markets, global economy, international
Financial Stability

Foreign Currency Exposure and Hedging in Australia

Tim Atkin and Jacob Harris

The 2022 Survey of Foreign Currency Exposure confirms that Australian entities’ financial positions, in aggregate, are well protected against a depreciation of the Australian dollar. The composition of Australia’s foreign currency denominated assets and liabilities means that, overall, Australian entities have a net foreign currency asset position. This has increased over a number of years, largely reflecting an increase in the value of foreign currency equity assets associated with superannuation funds. Meanwhile, the banking sector accounts for a large share of Australia’s foreign currency liabilities because of their offshore funding activities. However, the bulk of the banking sector’s foreign currency debt liabilities have been hedged. After hedging, the sector has a net foreign currency asset position and no significant currency mismatches, both of which reduce the risks associated with a large depreciation of the Australian dollar.

exchange rate, financial markets, international, funding, debt, investment

Reassessing the Costs and Benefits of Centrally Clearing the Australian Bond Market

Jon Cheshire and Joanne Embry

This article considers the costs and benefits of centrally clearing the Australian bond market, in light of developments in the market since the Reserve Bank’s last review in 2015. On balance, our analysis suggests that changes to the size and structure of the Australian bond market have strengthened the case for central clearing. These changes include substantial growth in the size of the market, increased participation of non-resident investors and increased complexity resulting from the growing number of bilateral clearing arrangements. Central clearing would simplify the market structure and could yield other benefits, especially in times of stress. For example, our estimates suggest multilateral netting has the potential to lower settlement obligations by $60 billion per day. This is more than can be achieved with bilateral netting. Further, market resilience and liquidity conditions might also be improved by multilateral netting as interbank participants’ balance sheet constraints are reduced. The key challenge for a potential central counterparty would be to develop a sufficiently wide network of products and participants to achieve overall benefits. Some participants face a lower incentive to join and in their absence the potential benefits from central clearing would be reduced.

bonds, central clearing, financial markets

The graphs in the Bulletin were generated using Mathematica.

ISSN 1837-7211 (Online)