The COVID-19 crisis has had severe impacts on the domestic and global economies, and it has unleashed a plethora of suggestions about how Australia can return to pre-COVID-19 times when we were setting world records for the longevity of our uninterrupted growth phase.
The reality, however, is that the pandemic came at a time of underlying weakness in the domestic economy. Recovering to the pre-COVID state should be just the first objective. In our efforts to restore the economy we need also to attend to the weaknesses that were evident well before the pandemic intervened.
Part of the weakness is attributable to widespread drought with the devastating summer bushfires season further detracting from aggregate performance. However, these were far from the full story. Notwithstanding strong employment growth over recent years, incomes growth outside of the financial and mining sectors was tepid; productivity growth had disappointed, residential construction had turned down and non-mining business investment was weak.
As shown in Chart 1, in the post GFC period GDP growth has been significantly lower on average than in previous decades notwithstanding the absence, until now, of recession. In contrast to the average annual rate of GDP growth in the 1980s, the 1990s, and the opening decade of the current century (averages of 3.4 percent, 3.3 percent and 3.1 percent respectively), the average annual rate of growth between the March quarter of 2010 and the March quarter of 2020 was 2.6 percent.
Chart 1: Annual GDP Growth and Average Annual Growth over each Decade
March 1980 – March 2020
Further, for the entire period since the September quarter of 2018 annual GDP growth has been below the lower average experienced over the period from March 2010 to March 2020. This puts the slowdown over the years prior to the onset of the COVID-19 crisis on a par with the disappointing performance associated with the GFC years.
Some of the underperformance is due to the largely uncontrollable forces of population ageing; the disruptions and readjustments associated with the rapid growth of China and other emerging economies; and the extent of technological change, the effects of which – both economic and social – are evident across the developed economies.
That said, Australia’s slower growth over the last decade has also occurred while our terms of trade have been very strong. As shown in Chart 2 below, the terms of trade have consistently been above the levels experienced in the preceding decades with the average for the most recent decade 53 percent higher than the average for the 1980-2009 period.
Chart 2: Australia’s Terms of Trade: 1980-June 2019
Over the 2010-2020 period the Trade Weighted Index (TWI), shown in Chart 3, averaged 67.6 which is 8 percent above the average for the 1980-2009 period of 62.6.
This difference may have accounted for some of the decline in performance of the domestic economy by disadvantaging exports and making imports more competitive relative to the earlier period. That point only goes so far however and over the most recent five-year period the TWI has been below the decade-average and indeed since mid-2015 has averaged 62.2 which is slightly below the average of the 1980-2009 period.
Chart 3: Exchange Rates: Trade Weighted Index 1980 to 2020
The missing link between these data series is the fall in productivity. As shown in Chart 4 below, compared with the average annual growth in labour productivity of 1.6 percent over the three decades from 1980, the average over the last decade was 1.2 percent for the economy as a whole. During the past five years labour productivity has trended lower still.
Chart 4: Productivity: GDP per hours worked 1980-2020
(% change on previous year)
While higher in absolute terms, labour productivity in the market sector also fell over the past decade from an average of 2.3 percent in the 1996-2009 period (this ABS data series only goes back to 1996) to 1.7 percent in the last decade. As shown in Chart 5, it too has trended still lower in the past half-decade.
Chart 5: Productivity: GVA per hours worked in the Market Sector 1996-2020
(% change on previous year)
On the latest readings the change in labour productivity was at or close to its lowest level in 40 years.
Thus, even as Australia was setting new world records for the longest period of uninterrupted growth, we were running out of steam and in need of reinvigoration.
As we set our sails for recovery, we need to chart a course that gives much more attention to the drivers of productivity growth. These include the skills of our workforce; our business capabilities; innovation; adaptability in our workplace relations; and taxation. None of these is a silver bullet and improvements in each of these areas has its role to play.
Ai Group has recently published a set of Post Pandemic Policy Papers which lay out Ai Group’s suggestions for advances in these, and other areas of fundamental importance to the strengthening of our economy and our society. These papers are available at https://www.aigroup.com.au/policy-and-research/policy-papers/.
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