While productivity remains a dominant topic of debate in Australia, Colter Bay Capital has argued the issue is being misdiagnosed, with the real problem lying elsewhere.
Australia talks about productivity the way a patient talks about a chronic ache: often, vaguely, and with little expectation that anything will change. Politicians invoke it. Economists chart it. The graph keeps drifting downward, and very little changes.
The label has always been slightly misleading. What Australia has is an investment problem, and the productivity decline is what it looks like from the outside. For two decades, the financial system has starved productive businesses of the capital they need to grow, while pouring credit into real estate assets that sit idle and lazily appreciate.
The numbers, once you look beneath the headline, are sobering. The Australian Bureau of Statistics reported a 0.6 per cent fall in whole-economy productivity over the most recent year. The disaggregated picture is even worse. Of Australia’s 19 industry divisions, eight now show negative five-year annualised productivity growth. Those eight sectors employ nearly 60 per cent of Australian workers and produce more than half of the economy’s gross value added (a critical measure of productivity). Construction is contracting at 1.2 per cent a year, manufacturing at 1.1, and retail at 0.4. These are foundational industries, and all three are heading the wrong way.
The familiar explanations no longer hold up. High interest rates, a tight labour market and post-pandemic disruption have all been blamed in turn, yet none of them withstand the data. If macroeconomic headwinds were doing the work, the decline would be spread evenly across the economy. The reality looks different. A handful of sectors are racing ahead: Information Media and Telecommunications grew productivity at 4.7 per cent annualised, Agriculture at 7.3 per cent, and Professional Services at 2.2 per cent. The common thread among them is investment. Each of these sectors has poured capital into the tools its workers use, including cloud platforms, AI-augmented analytics, GPS-guided equipment, gene editing and automation. These sectors with serious investment are pulling ahead of the rest of the economy.
Economists describe this as capital deepening, meaning simply equipping each worker with more and better equipment. The Federal Reserve Bank of St. Louis has identified it as the dominant driver of labour productivity in advanced economies, typically responsible for more than half of measured gains. Australia has been running the experiment in reverse. The capital-to-labour ratio fell 4.9 per cent in 2022–23, the largest decline on record, and has trended lower since 2003–04. The OECD’s June 2025 Outlook puts Australian business investment more than 30 per cent below its pre-Global Financial Crisis trend, one of the largest investment shortfalls in the developed world. Demand weakness explains only about a third of the shortfall. The remainder is, in the OECD’s polite phrase, “unexplained.” It is unexplained at the macroeconomic level. The structure of Australian credit accounts for much of what the macroeconomy cannot.
The Productivity Commission’s 2026 analysis sharpens the point. Market sector capital productivity has fallen 18.6 per cent since 1995, with the steepest decline between 2005 and 2014, when mining absorbed more than 46 per cent of total market sector capital formation. Over the same period, market sector research and development as a share of capital formation has fallen by more than 40 per cent. Volume is part of the story; composition is the larger part. Australia has built a credit system that rewards businesses that hold property on their balance sheet and disadvantages those that do not, regardless of which is the more productive enterprise. International research published in the American Economic Review shows that lending systems anchored to real estate collateral systematically favour property-rich firms over more productive but capital-light ones. IMF research across 68 countries finds that housing credit booms produce lasting drags on productivity growth. Australia fits the textbook description.
The consequences are concrete. Productivity growth is the only sustainable source of rising living standards. The arithmetic is straightforward: real GDP per capita can grow only through more hours worked per person or more output per hour. Australian participation is near record highs, and the population is ageing, which leaves output per hour to carry the weight. It is not carrying it. Since 1994–95, real wages have grown more than half a percentage point per year more slowly than labour productivity. Workers are capturing a shrinking share of gains that are themselves shrinking. Housing affordability is, in significant part, a productivity story: construction’s negative productivity growth means more labour hours per dwelling in a market where labour is already scarce. Healthcare and Education together employ 3.72 million Australians. If those sectors cannot lift output per input, the cost shows up elsewhere, whether through higher taxes, rationed services or rising public debt.
Employment growth without productivity growth is activity without progress. The country is adding hours faster than it is increasing output per hour, and the effects are felt in stagnant wages, unaffordable homes and strained public services. This is the quieter half of the explanation for why Australians feel the economy is working harder while delivering less.
The encouraging part of the story is that none of this is fixed in place. The sectors that have invested have lifted productivity, indicating that the broader decline is a function of how Australia allocates capital. The question worth asking is why the financial system so rarely allows capital to reach the businesses that can use it productively. The answer begins with the cultural addiction of real estate collateral on which Australian credit is built. Now is the time to change this for the better by directing credit to those productive and enterprising sectors of the Australian economy, driving productivity growth and higher standards of living for the coming decades.
By Sean Garman, chairman, Colter Bay Capital
