Australia’s economy ‘stuck in a rut’ of weak investment and productivity

ABC NEWS (Australia)

Inflation isn't the only drag on Australia’s economy. For decades, businesses have been incentivised to pay out profits rather than reinvest them. Alan Kohler explains.

Transcript

00:00Here's a chart of Australia's GDP growth since I joined the workforce aged 18 in 1970.

00:09It's been a long steady decline in contrast to the rest of the world which has seen a

00:13long steady increase in GDP growth.

00:17It must be my fault.

00:18I've dragged down the performance of the whole team.

00:21But no, as my mum used to say, don't flatter yourself.

00:24The reason is declining economy-wide productivity, which was good for a while and then it was

00:29not so good and then really bad.

00:34And that's meant that Australia's potential GDP growth has almost halved since 1980, from

00:39close to 4% to 2.1%.

00:43Now potential growth is a simple idea comprising two things, the number of hours worked in the

00:47economy and the amount of stuff produced per hour.

00:51It's also described as the economy's speed limit.

00:55So what's going on?

00:56Well, the simple fact is that businesses haven't been investing enough to keep up with the

01:00growth in population, so the equipment we're using is out of date or broken.

01:05That's called capital stock.

01:07Why haven't companies been investing?

01:09Well, I don't know how much to wait to put on this, but the start of the decline in investment

01:14coincides with the introduction of dividend franking.

01:17It's at that point that Australian companies started paying out more of their profits as

01:23dividends than the rest of the world, instead of reinvesting the money back in their businesses,

01:28buying new machines and computers.

01:31There is one type of investment that has been growing, it's more than doubled in fact,

01:35but it's unproductive.

01:37It's housing, although as we know that hasn't been keeping up with the population growth,

01:41so a shortage has developed.

01:43It means the Australian economy is stuck in a rut of weak business investment and weak

01:48productivity.

01:49It also means the Reserve Bank thinks it can't cut interest rates anymore without kindling inflation.

01:56So that's probably it for rate cuts.

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