HSBC’s chief economist Paul Bloxham has warned productivity constraints are stoking inflation and forcing future RBA tightening.
Australia needs a more ambitious pro-growth reform agenda to unlock what are described as “abundant” growth opportunities, as weak productivity continues to cap sustainable economic expansion, according to HSBC chief economist Paul Bloxham.
Despite only a modest upswing, growth is already above the economy’s “speed limit” because of poor productivity performance.
Bloxham said Australia’s weak productivity growth has put a low “speed limit” on how fast the economy can grow and is now a “clear and binding constraint”.
“A key result is that inflation has picked up to an already excessive rate, despite only a modest economic upswing,” Bloxham said.
As a result, he expects the Reserve Bank of Australia (RBA) to raise interest rates in 2026.
“The timing is uncertain, but our central case sees the RBA delivering one 25bp hike in 2026, most likely arriving in 3Q26, although we see a clear risk that the hike comes earlier than that,” he said.
However, Bloxham argued the main challenge for policymakers lies outside monetary policy.
“The key challenge for policymakers is not monetary policy – it is delivering fiscal and supply-side reform to support a lift in productivity growth,” he said.
He said “pro-growth” reform, particularly measures that lower the cost of doing business in Australia, is needed to encourage more business investment and innovation, noting that while a long list of reforms was discussed at the August 2025 economic summit, more progress is needed on implementation.
Bloxham also said a slowdown in public spending would help, arguing government outlays have been “crowding out” private sector activity by putting upward pressure on costs and interest rates and redirecting workers.
He said Australia has “an abundance of growth opportunities”, citing its large resource endowment, strong ties to Asia, and technology and energy transition-related prospects.
In particular, he said faster progress is needed on the energy transition and supporting the availability of low-cost energy supply. A lower cost base would support greater investment in critical minerals, while more should be done to rebalance exports towards fast-growing Indian and ASEAN economies.
Bloxham said Australia’s IT sector is “burgeoning, as the AI revolution arrives”, but despite growing fast it remains small and broader AI adoption lags. Fixing housing supply also remains a perennial issue.
He expects economic growth of only 2.1 per cent in 2026, but said even this modest pace is “a bit beyond what’s sustainable without a much-needed pick-up in productivity”.
Bloxham’s warning comes as inflation risks intensify and economists debate the near-term path for interest rates, with GSFM investment specialist Stephen Miller arguing inflation is now a “clear and present danger”.
Miller said he has “had a hard time convincing myself that the Reserve Bank of Australia will raise the policy rate when it meets on 10 February”, noting markets had priced only a 30 per cent probability of a hike at the time of writing.
However, he said the inflation outlook has shifted his view, despite headline CPI easing to 3.4 per cent in November from 3.8 per cent in October.
“I am increasingly convinced that inflation is a clear and present danger, one that is only exacerbated by government inaction – probably much to the chagrin of the RBA,” Miller said.
He cautioned against reading too much into a single inflation print, arguing underlying inflation remains inconsistent with the RBA’s 2 to 3 per cent target.
“Even an extremely modest increase in the December month trimmed-mean CPI of a little above 0.2 per cent implies a quarterly outcome somewhere between 0.8 and 0.9 per cent which is enough to drive the annual rate to 3.3 per cent,” he said.
Miller also pointed to a rebound in consumer spending and a labour market “in relatively good shape” as tilting the balance of risks towards tighter policy.
“That leaves me thinking that the RBA should raise the policy rate when it meets on February 10th,” he said. “I suspect it will.”
