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Productivity slump unlikely to last, says Westpac chief economist

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Australia’s recent decline in productivity is deemed unlikely to persist by Westpac Group’s chief economist.

Australia’s recent run of “exceptionally weak” productivity, indicated by a 3.6 per cent year-on-year drop in GDP per hour worked, is unlikely to last, according to Westpac Group chief economist Luci Ellis.

Ms Ellis explained in a recent note that the persistently low productivity in Australia, below pre-pandemic levels, is considered unusual, especially considering the preceding years had seen growth, albeit at a slower pace.

The latest national accounts showed that productivity – measured by GDP per hour worked – fell by 2 per cent in the June quarter, a dip that has also drawn the attention of the Reserve Bank of Australia.

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At the recent ASIC Annual Forum, RBA governor Michele Bullock said: “We haven’t had any productivity growth in Australia for a number of years.”

She explained that the RBA is watching the data because, in the absence of productivity growth, recent wage rises could pose challenges to the inflation target.

“Although wage rises of around about 4 per cent in a normal context of productivity growth aren’t necessarily inconsistent with our inflation target, if we don’t have any productivity growth, they’re on the high side and they’re going to contribute to rises in costs.”

Ms Ellis has interpreted Ms Bullock’s statement as an indication that the RBA is concerned about the potential lack of improvement in productivity.

In the note, she assessed that “without any kind of narrative about why productivity has fallen”, it is hard to quantify how much weight to put on the possibility that it will not recover.

As such, Ms Ellis attempted to provide an explanation for the decline in productivity.

She cited a recent article by RBA economists, which attributed the drop in part to “lingering compositional effects following the pandemic”.

According to this theory, people have not individually become less productive; there are simply relatively more low-paying jobs than before, which account for less GDP per hour.

“If true, this is a level shift effect and should not have a lasting effect on growth in productivity,” said Ms Ellis.

Additionally, the Westpac chief economist pointed out that the productivity measure in the national accounts is subject to measurement errors.

“It is the ratio of GDP to total hours worked. Both are noisy, and so their ratio is necessarily noisier and the change in the ratio even more so. It is entirely possible that the last year of data is just noise that will soon reverse out,” Ms Ellis said.

“It is also possible that data revisions will make the period of falling productivity look less stark, or even disappear.”

Ms Ellis acknowledged that an explanation based on “noisy data” is, however, unlikely to satisfy a “pattern-seeking, story-telling species”.

“One thing policymakers and other observers seeking a pattern do need to be mindful of is that unit labour costs are volatile. It is not appropriate to assume that one or two years of outcomes map directly into inflation,” she continued.

“Given how little room for manoeuvre the RBA has in the face of upside surprises on inflation, their concerns are understandable. But neither should they assume that Australian workers have mysteriously become less productive.”

According to Ms Ellis, the public debate in Australia is too often centred around the misbelief that productivity is something the government does to us, leading to calls for reform.

Instead, she said, productivity reflects decisions private businesses and other organisations make to improve how they work.

Australia’s declining productivity, shared with Canada but not the US and Norway, challenges the idea of a unique issue, and Ms Ellis suggests the capital-to-labour ratio, rather than a lack of reform, is a more relevant factor, indicating the slump is likely temporary.

Productivity slump unlikely to last, says Westpac chief economist

Australia’s recent decline in productivity is deemed unlikely to persist by Westpac Group’s chief economist.

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Jon Bragg

Jon Bragg

Jon Bragg is a journalist for Momentum Media's Investor Daily, nestegg and ifa. He enjoys writing about a wide variety of financial topics and issues and exploring the many implications they have on all aspects of life.

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