Economic Update: The productivity puzzle – or is it?

Summary:

• Recorded productivity growth has been very weak in recent quarters;
• Some of this reflects cyclical factors;
• But there are other reasons as to why the current data may understate productivity in the economy;
• Improving productivity growth should be a key focus over the next decade.

Recorded productivity growth has been weak

The June quarter 2023 GDP numbers were recently released. Economic growth in the quarter was decent (0.4%) and would certainly have been higher if it was not for material and workers shortages. We also found out that the first half of the year was better than we thought with economic growth in Q1 revised up (by 0.2%).

There was a fair bit of focus in the commentary on the GDP numbers about the very weak recorded productivity growth. Conceptually the best productivity measure is GDP per hour worked (productivity is not about working longer but smarter). By that measure Australian productivity growth has been low both by historical standards and compared with peer countries (albeit using GDP per worker as the productivity benchmark).

Strong productivity growth matters. It has been a notable bug-bear of the RBA recently that weak productivity growth could make it harder for inflation to return to 2-3%. Over the longer-term rising productivity growth funds after-inflation wages growth (‘real’ wages). Stronger productivity growth also would make it easier to pay for rising demands for higher government spending.

To read my full update, click here.

We live in interesting times.

Regards,

Peter Munckton - Chief Economist