The weakest productivity numbers in at least 25 years have unsettled the outlook for an economic recovery, a pick-up in wage growth and a string of budget surpluses predicted by the Morrison government and the Reserve Bank of Australia.
Former Productivity Commission chairman Gary Banks said that while he was cautious about the poor productivity reading, it “caps off what has been consistently weak productivity performance” in Australia and the serious need for structural reform to lift economic output.
“Trying to stimulate demand through monetary and fiscal measures won’t cut it, I’m afraid, and these pose risks of their own,” Mr Banks said. “The causes of [economic weakness] require regulatory and other reforms to enhance the supply side of the economy.”
Official figures showed that labour productivity fell 0.2 per cent in fiscal 2019, or even more, down 0.8 per cent when adjusted for the quality of work performed. It is the first negative recording since the data series began in 1994. Multifactor productivity, which includes labour and capital, also declined, down 0.4 per cent in fiscal 2019, the first fall since 2011.
While the figures are likely to reflect strong jobs growth at a time of weakened economic activity, including a drop in farm production because of the drought, many economists blame structural problems, such as a distinct lack of business investment, especially outside the resources sector.
The Reserve Bank is expected to hold off cutting the official interest rate from its current setting of 0.75 per cent at its monthly meeting on Tuesday as it awaits further evidence to support its view that the economy has reached a “gentle turning point”.
Financial markets have now priced in just a 10 per cent chance of a 0.25 percentage point rate cut on Tuesday. This is the last RBA meeting for the year; it will not meet again until February.
Treasurer Josh Frydenberg is hoping that Wednesday’s GDP numbers will show some acceleration from the 1.4 per cent annual economic growth in the June quarter, which was the slowest since the financial crisis.
Low interest rates and cheap money have fuelled record highs on the sharemarket and a property recovery, where prices jumped at an annualised pace of 32 per cent in Sydney in November, while the decline in business inventories has started to ease and is expected to contribute 0.2 percentage points to the September quarter GDP.
However, other economic data are showing some signs of a slowdown.
Job ads have fallen 12.6 per cent over the past year and could be a guide to the fall in employment last month. Also, building approvals have dropped 26 per cent during the past year, signalling a further slowdown in the construction sector, which makes up almost 6 per cent of GDP.
Mr Frydenberg has been pressing the states to help attain a goal of lifting productivity growth from the current five-year average of 1.1 per cent back to the long-term, or 30-year, average of 1.5 per cent.
This, he expects, will increase annual incomes per person by $3000 by the end of the decade and push GDP growth and real wages up by 4 per cent, helping deliver the government a surplus.
“The Morrison government is focused on lifting productivity with the biggest tax cuts in two decades, a record $100 billion infrastructure pipeline, 80,000 new apprenticeships and a new wave of deregulation reforms to boost business investment and create jobs,” he said on Monday.
RBA governor Philip Lowe is also hoping a pick-up in wage growth would be helped along by a 1 per cent increase in labour productivity.
Instead of lecturing business and pointing the finger, Josh Frydenberg needs to develop a comprehensive plan to boost productivity.
— Jim Chalmers, shadow treasurer
“I hope the economy can generate at least 1 per cent a year labour productivity growth, and if workers get their normal share of that, they should get 1 per cent increase in real wages a year,” he said at the Australian Business Economists’ dinner in Sydney last week.
The former assistant commissioner at the Productivity Commission, Dean Parham, said labour productivity was unlikely to be a long-term problem but still warned that it was an area the government would not want to miss out on.
“If weak labour productivity persists, it will make it harder for governments to achieve budget surpluses because that depends on output growth, which gives wage growth and higher income tax receipts for the government,” Mr Parham said.
The measure records the amount of output produced for an hour of work. An increase in labour productivity means more output is produced per hour of work.
The weak labour productivity figures also indicate that some extra levels of investment in educational attainment and work experience are not being borne out in more efficient output.
The Productivity Commission has also frequently attributed weak productivity to the lack of investment from companies.
Mr Parham said the broader global economic uncertainty was also likely to have contributed to a lack of investment.
Shadow Treasurer Jim Chalmers said the poor productivity figures were a reflection of the Morrison government’s lack of reform.
“It is a damning reflection of the Liberals’ economic mismanagement that annual labour productivity has declined for the first time on record,” he said.
“Productivity growth has stalled under the Liberals, in part driven by a decline in business investment, which is at its lowest level since the 1990s recession.
“Instead of lecturing business and pointing the finger, Josh Frydenberg needs to develop a comprehensive plan to boost productivity and get the economy going again.”
The most bullish of the big four bank economists, Westpac’s Andrew Hanlan, expects a 1.8 per cent economic growth reading for the year to September, which would make the RBA’s recently revised full-year 2019 economic growth rate forecast of 2.3 per cent still attainable.
“Our assessment is that output growth will strengthen in 2020, but still be at a below-trend pace given the ongoing challenging environment,” Mr Hanlan said.
However, he expected growth in employment to slow down.
“The unemployment rate will likely grind higher next year, rising to around 5.6 per cent.”
The most bearish of the banks, National Australia Bank, expects growth of 1.5 per cent – a fraction above the decade low of 1.4 per cent reached in June – and warns that the RBA might have to change its rhetoric.
“Weak growth could see the RBA reassess its view that the ‘economy is at a gentle turning point’ given its latest staff forecasts imply solid growth of 0.6 to 0.7 per cent in each of the next two quarters,” NAB chief economist Alan Oster said.