It’s productivity that needs the stimulus

The September quarter national accounts released by the Bureau of Statistics this week provided no new information to change the assessment that the Australian economy is continuing to grow but at a sluggish, below-trend rate. 

This has led to renewed calls for stimulus either by the government through fiscal policy or the Reserve Bank through monetary policy — or both. 

But such stimulatory action would do nothing to address the fundamental and related problems of depressed business confidence, low business investment and abysmal productivity performance.

Productivity growth is the wellspring of sustainable growth in real wages and per capita income more broadly. It is no coincidence that the era of real wage ‘stagnation’ has also been an era of weak productivity growth. 

In the same week that the ABS has told us real GDP grew by only 0.4% in the September quarter, it has told us that labour productivity actually fell in both 2018-19 and again in the September quarter, while market sector multi-factor productivity also fell in 2018-19 (no data for the September quarter). In the five years to 2018-19, labour productivity growth averaged 0.9% a year and multi-factor productivity growth averaged 0.6%. These are historically weak figures.  

Just as productivity growth sustains real income growth, business investment and innovation sustain productivity growth. But business investment has been at historically low levels in recent years.

It is often said the Australian economy is a cork bobbing around the global economic ocean, and our current travails stem from global economic and political developments. That is true up to a point, but it is not an excuse for failing to control what we can control.

Governments cannot determine productivity directly (other than in public sector operations), but they can shape the enabling factors and incentives that exert an important influence on market sector productivity growth. 

This is the key task for governments in current circumstances, and it is one for both federal and state governments.