‘It’s crunch time’: Govt urged to act on ‘dismal’ productivity growth

Policymakers must act on Australia’s sclerotic productivity growth, with rates of productivity virtually unmoved from nearly a decade ago, writes HSBC’s chief economist for Australia & New Zealand Paul Bloxham.

Despite the RBA pursuing the “most aggressive tightening phase in modern history”, the Australian economy appears to have successfully navigated its path to a “soft landing” – lowering inflation without tipping the economy into recession. What is more, job creation remains strong, with the country still boasting full employment (with only a slight increase to 3.8%, up from the 50-year low that it reached in late 2022 of 3.5%).

However, as Bloxham notes, productivity has flagged, with the chief economist noting that GDP per hour worked is today no higher now than it was in 2016. This is in large part due to persistent structural factors, further exacerbated ongoing weaknesses in the supply side of the economy stemming from pandemic-related supply chain disruptions.

These weaknesses, Bloxham said, have been aggravated by Covid-era job preservation policies, including the JobKeeper wage subsidy scheme and corporate insolvency moratoria, which HSBC has previously argued “delayed necessary adjustments in the economy and weighed on dynamism and productivity”.

Another contributing, though less consequential, factor may be the rapid expansion of the public sector workforce, which he notes “tend to have lowered measured productivity”. Bloxham hastened to add, however, that private sector productivity also remains “weak”.

The hope, particularly from the RBA, is that productivity weakness will be short-term, with the Reserve factoring in a rebound this year.

“An upswing in productivity is one of the RBA’s working assumptions, given they are assuming productivity growth of 1.1% y-o-y over 2025, following an assumed decline of 1.0% y-o-y over 2024,” Bloxham wrote.

However, this forecast growth is far from assured, as structural factors persist.

“If productivity is structurally weak, the economy cannot grow as quickly without putting excessive upward pressure on inflation. Living standards will rise more slowly than otherwise.”

“The election ought to be about productivity and how to lift it.”

Bloxham added: “We expect that the forthcoming election also increases the risk of more fiscal spending announcements supporting demand in the near term, that could underpin more growth and core inflation.”