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HSBC Research: Downunder Digest
Australia’s weak productivity growth is weighing on national income and living standards, and also has implications for inflation and interest rates. HSBC’s Paul Bloxham explains.
- Productivity growth has been very weak in recent years, with Australia’s output per hour worked currently at its 2016 level
- This is weighing on national income and living standards, and contributing to the sticky inflation problem
- Pandemic-related policy measures likely weakened the cyclical upswing in productivity; structural challenges remain
Australia’s productivity problems
“Productivity isn’t everything, but in the long run it is almost everything”, Paul Krugman famously quipped in 1994. For Australia, a large resource endowment has meant that productivity has not needed to be everything in recent decades.
Economic success, reflected in the strong growth of Australia’s national income, has been underpinned by resources exports – mostly iron ore, coal and gas – which have risen in value by a stunningly large 750% over the past two decades, as China emerged.
But ‘peak steel’ is likely to have already passed, ‘peak coal’ is coming soon (the IEA forecasts it to be later this decade), and ‘peak gas’ is likely to be a little further down the track. Australia’s ‘luck’ is unlikely to get repeated. To lift national incomes from here, Australia needs to focus on improving its productivity.
Weak productivity has been an issue for many years now, and, as we have argued, a lack of focus on reform is likely to have been one of the ‘resources curses’. Pre-pandemic, sluggish productivity growth was already an evident challenge. The recent performance has been dismal, with output per hour worked no higher now than in 2016.
The recent weakness may reflect the design of the pandemic-related response as it may have lowered business dynamism, while a tight jobs market may be exacerbating skills and geographical mismatches. Fundamentals, such as weak business investment, have also been a factor. Australia’s policy settings, particularly regarding competition, tax, investment and industrial relations have not been ideal for lifting productivity. A recent boost to public health and aged-care spending is playing a role. There is a clear need for a broader reform agenda focused on productivity.
Weak productivity is an inflation risk as well. Despite some recent slowing in wages growth, weak productivity is keeping unit labour costs too high, and is a factor that is likely to mean the RBA will only gradually ease policy, if at all.
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The following analyst(s), who is(are) primarily responsible for this document, certifies(y) that the opinion(s), views or forecasts expressed herein accurately reflect their personal view(s) and that no part of their compensation was, is or will be directly or indirectly related to the specific recommendation(s) or views contained in this research report: Paul Bloxham and Jamie Culling
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