Productivity is the Buzz Word of the Moment! But is it a Big Deal For the Economy as its made out to be?

Australia has a Productivity Problem…so we’re told. But as much as we hear it, we rarely hear the magnitude of the problem and what it all means for you? It is easy to think of productivity as doing more work with the same hours. That’s kind of true for individual workers, but it is millions and millions who make up an economy.

What is Productivity?

Productivity refers to how much output can be produced with a given set of inputs. So think of our description above, but on an economy wide basis. Output is the quantity of goods and services produced – gross value added (GVA) for an industry, or GDP for a whole economy. And input can be either labour or capital. Labour is people, but the labour input can be defined as either the number of employed persons or number of paid hours worked by employees. Capital can allude to benefits obtained from productive assets held by a business – whether a bank, mining company, tech start-up or health stock.

Economists are always looking for ways to increase productivity, and so are businesses on a micro level. For stock investors, improved productivity can mean more output with less resources, and so more returns for them – in the form of capital appreciation or dividends. Theoretically, it enables higher wages for workers and lower prices for consumers. On an economy wide basis, it can lead to stronger economic growth.

Does Australia Have a Problem with it?

Well not in the sense that productivity is going backwards. But growth is lower than it has been in years gone by. According to the ABS, long-term labour productivity growth has slowed since 2015-16. In 2023, the 20-year average annual growth rate was 0.9%, just half of the 1.8% it was 20 years ago.

So in that sense, yes Australia does have a problem. We could also delve into statistics for labour and capital, but we are not going to here.

So what should we do?

It depends on who you ask – everyone has their own solutions. The Business Council of Australia released a report two months ago and it suggested many ways including:

• Removing regulations (or red tape) that impede productivity growth
• Reforming the tax system (Read: Lower income and corporate taxes and higher consumption taxes)
• Supporting increased R&D and the uptake of new technologies

The BCA warned that productivity growth would need to quadruple to 2% in each year to 2030 just to match the performance in the last 20 years.

‘Productivity is the primary factor which will define Australians’ future quality of life. Simply put, there are ‘no free lunches’ and we must be able to produce more with what we have if we are to sustain growing wages and national prosperity,’ it warned.

‘If businesses cannot run efficiently and invest with confidence to strengthen their operations, the cost of what they are producing is higher than necessary. If the opposite is true, however, higher wages can be afforded without fuelling inflated prices’.

The AFR recently published an opinion piece of several CEOs and they essentially said the same thing. Some particularly alluded to challenging circumstances for their companies as a way to get around things. In particular, the bosses of Woodside and Santos used the examples of impediments to their projects taking much longer than expected to be approved as a demonstration our country has a problem with it.

Conclusion

When people say Australia has a productivity problem, they don’t mean it is going backwards but that growth is slowing. And there are calls for things to change (i.e. regulations) so that the situations can improve. If changes are made, this could be positive for many ASX stocks…at least in theory.

What are the Best ASX Stocks to invest in right now?

Check our buy/sell tips