Australia: Recurring productivity problem front of mind for RBA
Australia’s productivity malaise appears to be well entrenched across most sectors. Still, at the margin, it appears as though compositional change in the economy is also making a small contribution to the weakness in productivity. Since the start of the pandemic, there is a small, but negative correlation between output growth and the level of productivity. This means output growth has been concentrated in lower productivity sectors, which will be weighing on productivity performance in the aggregate.
What you will learn:
- Australia’s poor productivity growth has long been cited by policy makers as an area of concern. It is now being given increasing weight in monetary policy considerations. The RBA has noted on several occasions that absent an improvement in productivity, the current runup in wages will boost unit labour costs and likely warrant tighter policy settings.
- A productivity malaise is evident across most industries. Since 2015, business services and goods related industries have been the best performers in a weak field. Productivity growth has been very weak in household services, where automation is more difficult to achieve. The construction sector is a clear laggard, experiencing a secular decline in productivity.
- There are various narratives around the causes of the productivity malaise that generally tie back to a period of under investment in the non-mining sector. But these explanations are neither comprehensive nor simple to rectify. While there is no clear sectoral explanation for Australia’s poor productivity performance, at the margin growth in the economy appears to be slightly skewed toward lower productivity industries. This headwind has dampened aggregate productivity performance and will continue to do so in the medium term.
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