Australia’s productivity crisis ‘overstated’, says KPMG
Australia's recent dip in productivity growth reflects a typical downswing in the productivity cycle rather than a crisis, according to KPMG analysis.
A recent report by KPMG has found that Australia's productivity crisis is overstated with the current rate of productivity still within the normal bounds of a low productivity period.
KPMG's recent policy paper, Trends in Australia’s productivity growth, said while politicians and policymakers should be rightly concerned about periods of weak productivity, the analysis suggests that fluctuations in productivity growth are a normal part of economic cycles across nations.
However, the report warned that concern should be raised if the current period of weak productivity becomes extended.
"KPMG’s assessment of Australia’s productivity outcomes using the same analytical framework recently employed by the US Federal Reserve shows our low-growth regimes typically span around three years," the report said.
"Given Australia has endured such a slowdown for over two years now, it would be reasonable to expect productivity growth should start to naturally swing upwards."
KPMG noted that recent data from the US indicates a resurgence in productivity and given the economic parallels between the two countries, Australia may also experience a similar productivity rebound shortly.
"However, there are also reasons to be cautious about predicting a productivity rebound in Australia," the report said.
"While some positive indicators, like increased demand for skilled workers, offer some hope, other signs are less encouraging. Technology investment remains low, potentially hindering the adoption of productivity enhancing tools and processes."
Additionally, the report noted that unit labour costs remain elevated and are only expected to fall gradually, suggesting that efficiency gains may be slow to materialise.
"Furthermore, business sentiment remains subdued, indicating a lack of confidence that could impede investment and innovation," it said.
"Therefore, while the possibility of a productivity upswing in Australia cannot be ruled out, it is premature to definitively predict such a rebound given the conflicting signals present in the current economic landscape."
The report found that the structure of the labour market has played a critical role in the current slowdown, and suggested that labour and migration policies could be used to mitigate the cyclicality of productivity growth.
It recommended three key pillars to lift productivity including:
- Improved education and training for unemployed people.
- A re-design of migration to ensure supply and best utilisation of skilled migrants.
- Ensuring sufficient flexibility to allow for labour mobility.
Dr Brendan Rynne, KPMG chief economist and report lead author, said productivity is the key driver of real wage growth, so policymakers are right to be concerned about periods of low productivity growth.
"Our analysis indicates strongly that fluctuations in productivity are a normal part of economic cycles across nations, but there should be concern where those periods become extended and stretch beyond what history shows us is a typical downswing cycle," said Rynne.
“Australia should be looking to emerge from the current low in the productivity cycle by the middle of next year."
Labour mobility restrictions are also part of addressing Australia's productivity, according to Rynne.
"It is important that employment frameworks achieve the right balance between ensuring workers are treated fairly at times of economic shocks and creating frictions in the labour market by imposing unnecessary costs on good employers," he said.
Given there is a positive correlation between productivity and skilled migration, especially in the first five years after arrival in Australia, Rynne said this has links to greater GDP.
"This means more targeted skilled migration and visa systems should be a priority."
