Australia | 11:00 AM
It's Australia’s Private-Sector Productivity Trap: Why Capital Shallowing Could Blindside Investors.
By Paul Githaiga
The Productivity Puzzle Investors Can’t Ignore
If Australia’s economy were a car, productivity would be its engine — and right now, that engine is losing power.
According to the ABS’s Measuring What Matters – Productivity indicator, the 20-year average annual labour productivity growth slowed to 0.9% in 2022-23 (down from 1.2% in 2021-22 and well below the 1.8% recorded in 2003-04).
This confirms a multi-decade deceleration, not just a post-pandemic blip.
The Productivity Commission’s Quarterly Productivity Bulletin – March 2025 paints an equally sobering picture. Labour productivity fell -0.1% in the December 2024 quarter and was -1.2% lower over the year.
That drop follows an even sharper decline (more than -6% between March 2022 and June 2023) as the so-called covid-era “productivity bubble” burst.
The PC identifies capital shallowing as a key driver.
Hours worked have surged to near-record levels. Yet, capital per worker has not kept pace.
Firms struggle to scale equipment, technology, and infrastructure quickly enough to match the labour input.
Also, a wave of younger, less-experienced workers has temporarily reduced average workforce productivity.
For investors:
The implications are clear: when output per hour stagnates or falls, unit labour costs rise.
This squeezes profit margins unless companies can raise prices or invest in productivity-boosting assets.
Sectors that rely heavily on labour, such as accommodation, food services, and parts of the care economy, are particularly exposed.
Conversely, capital-intensive industries that keep investing in modern plant, automation, and digital systems are better positioned to weather the slowdown.
Pop Went the Bubble: From Pandemic Highs to Productivity Stagnation
If the past three years of Australia’s labour productivity data were a stock chart, the line would look like a sharp spike… followed by a cliff.
Between March 2022 and June 2023, labour productivity plunged more than -6%, wiping out almost all of the gains made during the pandemic’s unusual surge.
Since then? Flat.
Why should investors care? Because such a rapid erosion of output per hour —if it continued— would pressure corporate earnings, weaken real wage growth, and weigh on long-term capital returns.
The “Productivity Bubble” Explained
During lockdowns, many of the lowest-productivity industries —such as accommodation, food services, and arts— were effectively shut down. This temporarily tilted the workforce toward higher-productivity sectors, inflating the national numbers.
But as restrictions eased and those industries reopened, the composition effect reversed. Hours worked hit record highs, yet capital per worker didn’t keep up; a classic case of capital shallowing.
The sudden influx of younger, less-experienced workers also lowered average productivity, at least temporarily.
The result: the “productivity bubble” burst, sending the index back to where it sat in the pre-pandemic years of 2015–2019.
Line chart showing Australia’s labour productivity index from 2015 to 2024, comparing market sector and whole economy. Highlights COVID surge in 2020, gradual gains until 2022 peak, followed by a -6% drop and stagnation. Source: Productivity Commission, March 2025.
Investor takeaway: The key risk isn’t just the post-covid correction — it’s that Australia’s productivity levels have barely moved in over a decade.
Without sustained investment in capital and skills, the next decade could look a lot like the last.
Enter “Capital Shallowing” — The Under-Discussed Culprit
Infographic showing Australia’s private-sector productivity trends, capital shallowing impact on corporate earnings, sector performance divergence, and macroeconomic implications for investors
In simple terms, capital shallowing happens when businesses aren’t investing enough in tools, equipment, technology, and infrastructure to keep workers productive.
Think of it like a chef in a busy kitchen. Give them sharp knives, modern ovens, and well-organised prep space, and they can serve twice as many dishes at the same time. But take those tools away —or fail to replace them— and their output drops, no matter how hard they work.
This is exactly what’s been happening in parts of Australia’s private sector: capital per worker is stagnating, sometimes even declining. And when capital shallowing takes hold, productivity flatlines or falls.
Why Investors Should Care
Capital shallowing is more than jargon. It changes how companies grow, how margins behave, and how markets re-rate sectors. The latest official data show the risk is real (and measurable) right now.
1) Lower corporate earnings growth — the math is simple
When businesses cut back on capital investment per worker, output per hour tends to slow. That forces firms to grow largely by adding labour or lifting prices. Both paths are costly and brittle.
The Productivity Commission and ABS show market-sector multifactor productivity remains weak (MFP rose just 0.1% and labour productivity rose 1.1% between 2022–23 and 2023–24), signalling a low productivity payoff from current inputs.
That makes sustained revenue and margin expansion harder to deliver without fresh capital deepening.
What investors should watch: Multi-year trends in capex-per-employee and capex-to-revenue in company reports. A sustained fall in either ratio is an early warning the business is relying on more labour, not smarter capital, to grow.
2) Margin squeeze risk — wages can rise faster than output
Unit labour costs and wages matter here. If pay rises while output per hour stalls, unit labour costs rise and margins compress unless prices move up.
The RBA and national accounts highlight that weak productivity since the mid-2010s has already put upward pressure on unit labour costs and added to the inflation and margin mix companies face.
That dynamic makes firms with labour-heavy cost bases (healthcare, aged care, some professional services) particularly vulnerable to margin erosion.
Investor checklist: Look for companies reporting rising labour cost per unit (or slowing revenue per FTE) alongside flat or falling capex intensity. Those firms are the most at risk of margin squeeze.
3) Sector divergence — winners and laggards will separate faster
Not all industries are the same. The ABS 2023–24 MFP data show stark cross-industry differences: some sectors (agriculture, parts of transport) had positive MFP gains, while several services industries —notably professional, scientific & technical services and arts & recreation— posted negative MFP in 2023–24.
That means capital-intensive firms or those investing in automation and scale can pull ahead, while under-invested service firms face stagnation. The market can re-rate winners rapidly if capital deepening resumes in targeted sectors.
How to act: Favour firms with rising capital intensity and measurable tech/automation investments. Avoid names where capex falls but staff counts rise; those are the classic signs of capital shallowing at work.
4) Macro headwinds — slower productivity lowers GDP potential and shapes policy risk
At the macro level, capital shallowing drags down GDP per hour and the economy’s growth ceiling. That in turn affects interest-rate paths, inflation dynamics, and exchange rates; variables that feed directly into valuation models and cost of capital.
The Productivity Commission and Treasury have made this a policy priority; the Commission recently proposed tax and cash-flow incentives aimed at boosting investment and easing SME credit constraints.
If such reforms gain traction, they could alter investment returns sector-by-sector. But reform is uncertain and timing is long-dated; investors should plan for both slow-moving structural risk and the possibility of policy-driven re-rating.
Signal to track: official policy moves (Productivity Commission/Treasury statements), and whether measures are modelled to raise private-sector capex materially (watch Treasury/PC scenario papers).
Quick data snapshot
-Capex: ABS shows total private new capital expenditure fell modestly in the latest release (total new capital expenditure -0.1% quarter-on-quarter; equipment, plant & machinery -1.3% in the latest quarter). That points to continuing weakness in privately funded investment.
-Productivity: Market-sector MFP rose just 0.1% and labour productivity 1.1% between 2022–23 and 2023–24; well below historical averages and consistent with the “stalled productivity” diagnosis.
-Jobs composition: Industry and labour reporting (Jobs & Skills, Ai Group summaries) show a large share of recent employment growth has been in government-funded or non-market activities (health, education, public administration). That pattern reduces the private sector’s need to deepen capital per worker.
-Policy signals: The Productivity Commission has floated major tax and cash-flow reform ideas designed to raise private investment (including changes that would effectively encourage immediate expensing of capex).
These are serious proposals but would take time to legislate and scale.
Concrete, investor-ready checklist (what to monitor every quarter)
-Capex guidance vs actuals: Is management increasing capex budgets year-on-year?
-Capex per employee: Is capex rising faster than headcount?
-Revenue per FTE: Is revenue per employee growing (a sign of rising productivity)?
-Unit-labour-cost trend: Are labour costs per unit rising faster than revenue per unit? (RBA and ABS tables).
-Policy updates: Any Treasury/Productivity Commission papers that include capex lift scenarios.
Investor takeaway:
Capital shallowing is a slow, measurable drag on earnings and valuations. The good news: it can be tracked with company numbers and official statistics.
The better news: it creates differentiated opportunities.
Companies that continue to invest in productive assets and raise capital intensity are likely to win the next cycle, and they will probably be re-rated when policy or demand finally lifts private investment.
What’s Driving the Shallowing Trend?
-Short-termism — management trimming long-term capex for near-term results.
Boards and executives often delay or cancel multi-year investment plans when market pressure mounts or earnings beats are prioritised.
Australia’s productivity reviews and RBA research point to weaker-than-expected private investment in the 2010s and 2020s as part of the problem.
Watch: Multi-year capex plans in annual reports and changes in capex-to-revenue ratios.
-Uncertainty — global shocks and policy volatility blunt investment appetite.
Supply-chain disruptions, geopolitical risk and tighter/less-predictable monetary policy raise hurdle rates for big projects; the RBA notes firms cite uncertainty when explaining weaker investment.
The IMF and Treasury also flag slowing private business investment in recent periods.
Watch: Business investment series (ABS), capital-spending intentions surveys, and RBA liaison notes.
-Labour-market tightness — firms hire to meet demand rather than automate.
When labour is relatively available and firms face immediate capacity needs, the quick fix is hiring. Australian labour markets have been unusually tight since 2022, which can reduce urgency for capital deepening and raise unit-labour-cost pressure.
Watch: Vacancies-to-unemployment ratio and revenue-per-FTE trends in company reporting.
-Digital-transition gaps — uneven tech adoption leaves many firms behind.
Adoption of automation, cloud and AI is rising but patchy across industries and firm sizes in Australia.
Government and industry surveys show meaningful uptake among some firms but large gaps remain, limiting broad-based productivity gains.
Watch: Industry tech-adoption surveys (Industry.gov.au, Ai Group) and capex in ICT/automation categories.
Spotting Winners vs. Laggards
Use two simple ratios as the screen: capex per employee and capex-to-revenue.
-Winners: rising capex/employee and rising capex/revenue over several years. Investing in automation, ICT, or capacity expansion.
-Laggards: capex below industry median, falling capex/employee, or headcount rising faster than capex. Those firms often face future margin pressure.
Investor tip: screen for multi-year trends, not single-year blips. A steady decline in capex intensity is the red flag.
The Policy and Macro Backdrop
Policymakers see the problem. The Reserve Bank, Treasury and the Productivity Commission all flag productivity as a key issue. (So it’s on the agenda.)
That said, reversing capital shallowing fast is unlikely. Fiscal tightening, global uncertainty and an economy dominated by services make rapid turns rare. Short-term fixes won’t do the heavy lifting.
Watch these concrete signals:
–Investment incentives and tax moves. Look for policies that lower the cost of capital (immediate expensing, temporary investment allowances, or R&D incentives). They change project economics and can lift private capex.
Watch: Official Treasury papers and Budget measures.
–Sector-specific investment booms. Public or private pushes in renewables, defence, advanced manufacturing or semiconductors can create concentrated capex waves. Those waves lift suppliers and re-rate related mid-caps.
Watch: Government procurement announcements and major project approvals.
–Long-term corporate capex guidance. Annual capex budgets matter less than multi-year programs. Firms that publish 3–5 year plans (with milestones and funding sources) are more credible capital deepeners.
Watch: Company strategy slides and long-range guidance in investor packs.
–SME credit and financing access. Easier lending for smaller firms lets them invest. Tight bank rules or higher capital costs squeeze smaller players and slow broad-based capex.
Watch: APRA/Treasury commentary and small-business lending statistics.
Quick checklist for investors:
-Did announced policy change lower effective hurdle rates?
-Is a sector getting a sustained, funded push?
-Does a company show multi-year capex with committed funding?
Answer “yes” to any of these and the risk of persistent capital shallowing falls (at least for that sector).
Bottom Line for Portfolios
Capital shallowing is a slow-burn risk that doesn’t make headlines like inflation or unemployment. That said, it’s just as capable of reshaping market winners and losers.
For investors, the message is clear:
-Track corporate investment patterns as closely as earnings.
-Reward companies that reinvest in productivity.
-Be wary of sectors where under-investment is becoming entrenched.
When productivity stalls, so too does the compounding magic that drives long-term portfolio growth. The trick is to see it coming — before the market prices it in.
Technical limitations
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