Australia’s sluggish economic performance in late 2018 has continued into early 2019. In the first quarter of 2019, economic growth slowed to just 1.8% over the year. This is the slowest rate of economic growth since the height of the Global Financial Crisis.
The Australian Treasury and the Productivity Commission often look at economic growth by breaking down the so called ‘three Ps of economic growth’. The three Ps commonly refer to Population, Participation and Productivity. They essentially look at how many people are in the economy (Population), how many of those people are working (Participation) and how much value are they generating from that work (Productivity).
Currently, Australia gets a tick for two of the three Ps.
Australia’s population grew by 1.6% or just over 400,000 people in 2018, one of the highest growth rates among advanced economies. Most of Australia’s population growth is driven by overseas migration, which accounts for about 61% of Australia’s population growth, while natural increases (births minus deaths) account for the rest. The make-up of migrants coming to Australia has shifted in recent decades. Persons aged under 40 have become a much higher share of population growth in recent years, comprising mainly of students to the point where international students now account for more than 45% of net migration and educational exports account for about one-tenth of Australia’s GDP.
Growth in the population increases the overall size of the economy but does not increase output per capita, at least in the short-run. In 2016 the Productivity Commission (PC) formally reviewed Australia’s migration program. It found that the greatest benefits to the community come from younger, highly skilled migrants. The PC found that in the long run, the previous immigration program (before the most recent changes to the permanent migration cap) delivered a measurable ‘demographic dividend’ which raises output and incomes for everyone.
The proportion of adult Australians currently working or looking for work (known as the participation rate) reached a new record high of 65.9% in May 2019. This latest increase in participation reflects ongoing and long-term changes in gender work patterns over the past three decades. Rising female participation is more than offsetting falling male participation, with female participation now at 61%, up from 44% in 1980. Many observers had expected the participation rate to decline from its recent peak in 2010 due to our ageing population, but structural forces could be encouraging greater participation, including trends towards less physically demanding work (e.g. in services industries), increased flexibility in working conditions and improvements in health outcomes.
Recent productivity data derived from the Australian Bureau of Statistics (ABS) National Accounts confirms that the recent slump in productivity growth in late 2018 has continued into 2019. Total Gross Domestic Product (GDP) per hour worked is a rough proxy for labour productivity and has fallen for three consecutive quarters and six out of the last nine. Looking at the ‘market sector’ sections of the economy only (that is, excluding public and non-tradeable services), the National Accounts indicate that GDP per hour worked fell by 0.9% over the year. The average since 2000 has been 1.8% p.a. but this has not been reached since the start of 2017.
In June 2019, the Reserve Bank of Australia (RBA) reduced the cash rate to a record low of 1.25%. The loosening of monetary policy is expected to stimulate the economy in the short-run but is not a long-term solution. The most quoted quote in economic history still holds true:
“Productivity isn’t everything, but, in the long run, it is almost everything. A country’s ability to improve its standard of living over time depends almost entirely on its ability to raise its output per worker.” – Paul Krugman (1990), The Age of Diminished Expectations.
Real wages (and living standards) are best strengthened through improved productivity across the economy. A clear focus on productivity-enhancing reform ought to be the key focus of all governments in Australia right now.
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