Australia | Jun 26 2007
By Greg Peel
Opposition leader Kevin Rudd was embarrassed recently when it was revealed the ALP spin doctors had instructed in ways of making the latest productivity statistics seem worse than they really were. While the government understandably leapt on the leak to its advantage, the fact remains the numbers are not particularly encouraging. The ALP could have played its hand a lot more intelligently.
Economists define productivity as economic output per hours worked, or if you like the addition to the GDP provided by one man working one hour. The government has made much recently of Australia’s low unemployment rate, but having everyone employed doesn’t necessarily equate to more production, more profits, and more economic growth. Full employment is of little use if you’re only spreading the work around rather than increasing the output.
CommSec’s chief economist Craig James notes: “A sustained increase in productivity boosts economic growth and assists in keeping inflation low and interest rates unchanged. Stronger productivity also has potential to improve profitability and, in turn, lead to higher share prices.”
The Bureau of Statistics released the March quarter national accounts recently revealing that estimates indicate productivity grew by 0.6% in the quarter. The government then used this figure to suggest the ALP’s attempts to undermine the government’s oft touted economic record via the productivity argument were ill-informed. However, one needs to read further into the figures.
Productivity in the December quarter grew by 1.4% so March quarter productivity growth actually slowed – to 0.9% annualised down from 1.8% in December. This is the lowest level of productivity growth in 18 months. Moreover, average productivity growth over the last five years comes in at 1.7% per annum – the slowest growth rate in 16 years.
During the 1980s productivity growth was a paltry 1.5% but the 1990s brought improvement to 2.7%. Most notably, the second half of the 90s posted 3.1% which was achieved with 4.3% GDP growth and 2.0% inflation. Do those numbers sound familiar?
CommSec notes market sector GDP grew by 4.4% in the 2007 March quarter which is the strongest result in almost three years. But in achieving this result, Australians worked 3.5% more hours per week – the strongest growth in that figure for almost two years. These numbers support anecdotal evidence that a solid economy may be providing the means to buy a flat screen TV, but not the time to spend with the children. Yet full employment also means one need not work like a Trojan at the risk of losing one’s job.
It is quite possible that the current slow rate of productivity growth is only temporary, James suggests. In the last two years, Australian companies have been throwing their efforts behind acquiring new equipment and a larger labour force. Over that time employment has grown 2.5% and business investment 25%. Neither man nor machine can be brought to the most efficient level of production overnight. These things take time.
The figures bear out this argument to some extent. Those sectors recently under the most threat in this country – retailing and manufacturing – have faced competition from cheaper exports and a strong Aussie dollar. Labour force growth has been weakest in these sectors as companies have kept a very wary eye on costs, but the end result is they are the stand-out sectors in terms of productivity growth. The transport & storage sector has also faired well.
There are no surprises in the agriculture sector, given the drought, but recent rains have meant signs are improving.
So it’s over to the booming sectors – mining and utilities. We all know that any Tom, Dick or Harriett could get a job down a mine tomorrow, so stretched are mining companies in their attempts to cash in on the resource boom. However, has an employment scramble occurred at the expense of productivity?
The figures over the last five years suggest this is so. Over this period, mining has been the least productive sector in the economy. However, it appears that massive investment in equipment and labour is beginning to finally pay off. For the first time in five years, two consecutive quarters of productivity growth were recorded in the mining sector – December and March.
Unfortunately the same cannot be said for the utilities sector, in which productivity has fallen 4.3% in the last four years – the worst figures in 20 years.
Craig James suggests state and federal governments need to have a good look at efficiencies within the sector, given its importance to the economy. The utility sector is likely exhibiting the flipside of the retail and manufacturing sectors, which are up against stiff competition. Lack of competition has led to complacency in electricity, gas and water.
Treasurer Costello has attempted to stimulate the Australian economy by targeting the three Ps – population, participation, and productivity. Clearly an economy would thrive if the population grew, more of those people had jobs and they all increased their output per hour worked. A state of nirvana. The reality is of course that it’s very hard to have all heading in the right direction at the same time. As it is, population growth has hit 16-year highs, and unemployment 30-year lows, but productivity growth remains muted.
The productivity numbers can be volatile, given that a spurt of investment in man and machine will affect a brief slowing of productivity before everything is running like clockwork and productivity numbers soon leap. For the economy’s sake, the hope is that this is the case. But as James concludes:
“So while the lift in productivity in the past six months is encouraging, the gains will need to be sustained before declaring that the downtrend has been arrested or reversed.”