All roads lead back to productivity

26 March 2019

This opinion article by Business Council chief economist Adam Boyton was published in the Financial Review on Tuesday 26 March 2019.

Last week saw the unemployment rate drop below 5 per cent. Additionally, over the past year jobs growth has been strong and, contrary to what many think, predominantly full-time.

At the same time GDP growth has weakened. That juxtaposition of weak GDP growth versus strong employment growth has led to a debate on which one of these two indicators is telling the truth about Australia's economy.

The difference between the two is a healthy economy versus one at risk of stalling. So getting to the bottom of this matters.

Or is there not a conundrum at all?

If we adopt a productivity centric way of thinking about the economy then there may not be any conundrum. Namely, the combination of weak GDP growth but strong employment growth also produces weak productivity growth. Which is something Australia is also experiencing.

So is the real problem in the Australian economy just one part of the Australian Bureau of Statistics giving a different answer to another part? Or is it a more structural productivity slowdown?

If you take that second view, then the solutions to the weakness in growth need to include a renewed focus on policies that encourage investment, policies that add to human capital and policies that enable our existing investments to be used more efficiently and effectively. That in turn means a renewed focus on making sure regulation passes a genuine cost benefit analysis and achieves its intended outcomes at least cost. It means making sure Australia is able to attract investment opportunities rather than see other countries grab them.

Put simply, if the problem is a productivity slowdown then policy solutions need to be focused on lifting productivity. Everything else equal, that will in turn lift economic growth. A productivity centric view also explains the weakness in wages growth.

As the Reserve Bank governor noted in his parliamentary testimony last month, over the past 10 years productivity and real wages have increased by about the same amount.

Over the first five years wages rose more rapidly than productivity, while over the second five the reverse was the case. And over the full 10 years productivity growth has broadly matched changes in real wages.

What about the past year? Labour productivity has risen by 0.8 per cent. Real wages have risen by 0.5 per cent. That's about as in line with each other as you're ever likely to see given the challenges inherent in measuring the Australian economy.

And as the most recent Business Indicators release from the ABS showed, if we exclude the mining sector (where profits bounce around due to movements in commodity prices) then the wages bill has risen faster than profits over the past year.

The Business Indicators release also shows that profits in the non-mining sector actually fell over the second half of 2018.

Which highlights another problem with the GDP growth versus employment "debate". And that's that there are more than two pieces of economic data published in Australia. There are, of course, dozens of various economic indicators. So why just focus on two? With that in mind, what does the Australian economy look like if we take a broader sweep of data?

Lending to households has fallen 17.5 per cent over the past year, the National Australia Bank's long-running monthly business survey reports a large decline in business conditions over the second half of 2018 and into 2019, profits in the non-mining sector fell over the second half of 2018 and retail sales rose just 0.1 per cent in January after a 0.4 per cent fall in December. House prices in Sydney and Melbourne have been falling for a while, with house prices now having fallen in Brisbane, Darwin and Perth as well over the past year.

That really does make the concept of a GDP versus employment debate look a little more like an employment versus most of the rest of the economy debate.

Which invites the question of where to from here for jobs? Some leading indicators of employment growth, like the ANZ's job ads series, have started to soften, although that's yet to be reflected in the jobs official data, with the unemployment rate now below 5 per cent.

Here's hoping that the strength in employment will continue. Because without ongoing robust jobs growth and a low unemployment rate, it will become harder and harder to see the bright spots in our economy. And that it's becoming harder to find the bright spots also means it's high time for a renewed focus on reforms to strengthen the economy and boost productivity.


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