The Great Slowdown: Inside Australia’s Productivity Crisis
The Great Slowdown: Inside Australia’s Productivity Crisis
In recent months, there has been growing discussion around Australia’s labour productivity, but what exactly does that mean, and why is it important for the country’s future?
Productivity refers to how efficiently inputs (like labour and capital) are used to produce outputs (goods and services). Productivity increases when more output is made with the same number of inputs, or when the same production is achieved with fewer inputs. Typically, increased productivity comes from investment in better technology and equipment for workers or better management practices.
There are two key types of productivity being measured:
1. Labour Productivity
Measures output per worker or per hour worked.
Influenced by factors such as workers’ skills, technology, management practices, and quality of inputs.
2. Multifactor Productivity (MFP)
Measures output per unit of combined inputs (typically labour and capital).
It can also include energy, materials, and services.
MFP captures improvements in efficiency not explained by changes in input quantities — for example, better technology or innovation.
Historical Trends
Source: ABS Productivity Statistics
Focusing on Australia’s Mining Boom post GFC, it is clear how labour productivity growth declined steadily close to zero. This can be explained by China’s dwindling demand for Australian mineral exports during the period. Following the initial post-GFC stimulus in China, which had temporarily boosted demand for commodities, growth began to moderate as China pivoted from an investment-heavy model towards a consumption-led economy. As a result, the rapid expansion in Australia’s mining sector, which had previously driven strong labour productivity gains through high output relative to labour input, began losing momentum.
As of early 2025, Australia’s productivity performance has become a growing concern. Labour productivity, measured as GDP per hour worked, fell by 1.2% over the year to December 2024, marking the second consecutive annual decline.
This drop is largely driven by a shift in employment toward lower-productivity sectors such as hospitality and care services, which, despite capital deepening, tend to generate lower returns on both labour and capital inputs. At the same time, multifactor productivity growth has also slowed, contributing very little to overall productivity. This suggests that the issue is not merely about labour input but reflects broader structural challenges facing the Australian economy.
Key causes of a productivity slump
A dramatic increase in immigration
Australia has experienced one of the fastest population growth rates among developed nations, largely driven by high levels of immigration. While immigration can stimulate economic growth by expanding the labour force, it has also contributed to “capital shallowing,” where the amount of capital, such as machinery, infrastructure, and technology, available per worker does not keep pace with the growing workforce.
This imbalance reduces labour productivity because workers have less capital to work with, leading to lower output per hour and slower per capita GDP growth.
An aging population
Australia’s population is aging, with a rising proportion of older workers and retirees. This demographic shift tends to reduce the overall labour force participation rate and slow productivity growth. Older workers may have lower adaptability to new technologies and innovation, which can dampen productivity gains.
Additionally, an aging population increases demand for health and social services, sectors that have recently experienced significant productivity declines. For example, healthcare and social assistance productivity fell by 13.5% over 18 months, even as employment in the sector grew by 28%. The growing number of retirees also means fewer workers are available to support a larger non-working population, placing further pressure on productivity to maintain living standards.
A shift towards lower-productivity sectors
The Australian economy has undergone a structural transformation, with a shift away from high-productivity sectors like manufacturing and mining toward service-oriented and non-market sectors such as healthcare, social assistance, and public administration.
These sectors generally exhibit lower productivity growth, and in 2025, the strongest industries were the non-market sectors of education, public administration, and health, all of which saw significant growth, reflecting the ongoing reliance on government spending to prop up the economy. By contrast, Australian manufacturing is in terminal decline, falling to only around 5% of the economy in 2024, and is now the lowest manufacturing share in the OECD. This decline has been intensified by soaring energy costs on the East Coast, which have driven up input prices and led to widespread closures and downsizing among manufacturers.
So, what does this mean for the Australian Market?
Slowing economic growth
In 2025, Australia’s productivity decline is directly weighing on its economic growth potential. With the recent decrease in productivity, even with rising employment and hours worked, the economy is producing less output per unit of labour. As a result, Australia’s overall capacity to grow sustainably has weakened, contributing to subpar GDP growth forecasts in the near term of between 1.9-2.1%. For investors, slower growth means potentially lower returns on investments tied to economic expansion, such as equities and real estate.
Weaker wage growth and household spending
Productivity growth is a key driver of real wage increases. With productivity stagnant or declining, wage growth slows. This reduces household income growth, limiting consumer spending, the biggest part of Australia’s GDP. Slower consumption growth then feeds back into slower overall economic activity. This means, weaker consumer spending can reduce corporate profits, affecting dividend payouts and stock valuations in consumer-driven sectors.
Public sector and infrastructure spending pressure
With weak productivity limiting private sector growth, the government often steps in with increased spending to support the economy. While public investment can boost activity in the short term, it is not a substitute for sustained productivity growth, which is critical for long-term improvements in living standards.
In May 2025, the government announced key initiatives, including a $900 million National Productivity Fund to encourage state reforms for competition and efficiency, significant investments in infrastructure and housing reforms, such as zoning changes to increase housing supply, and targeted funding for AI and innovation across states. These efforts aim to alleviate bottlenecks and stimulate economic activity, but their long-term impact depends on successful implementation and complementary private sector engagement.
Investors in infrastructure and government bonds may benefit in the short term from increased public spending, but long-term private sector investment opportunities could remain constrained if productivity challenges persist.
Competitiveness and trade impacts
Slower productivity growth will make Australian industries less competitive internationally, potentially reducing export growth. Given Australia’s reliance on trade, this impacts the broader economy’s growth potential and resilience to global shocks.
In May 2025, Australia’s productivity growth has averaged just 0.2% annually over the past decade, one of the lowest rates among advanced economies. This stagnation has led to increased production costs, particularly in energy and labour, eroding the competitiveness of Australian exports. For investors, reduced export competitiveness can mean lower profits for export-oriented companies and increased volatility in related markets.
Restoring productivity for sustainable growth
Australia’s recent productivity slump reflects a combination of structural, demographic, and sectoral shifts that have profound implications for the economy’s long-term health. While labour and multifactor productivity once underpinned strong growth, these measures have weakened significantly in recent years, weighed down by rapid immigration outpacing capital investment, an aging workforce, and a shift toward lower-productivity service sectors.
The consequences are clear: slower economic growth, weaker wage gains, constrained consumer spending, and diminished international competitiveness. Although the federal government has responded with targeted reforms and investments to stimulate innovation and efficiency, sustained productivity recovery will require a coordinated effort across public and private sectors.
For policymakers, businesses, and investors alike, confronting these challenges is essential to ensuring Australia’s future prosperity and economic resilience.
Kurtis Castorina Investment Strategy Analyst, Your Future Strategy
The current global economic outlook is marked by uncertainty. With escalating trade tensions, financial market volatility, inconsistent policy responses, and…
In recent months, there has been growing discussion around Australia’s labour productivity, but what exactly does that mean, and why is it important for the country’s future?
Productivity refers to how efficiently inputs (like labour and capital) are used to produce outputs (goods and services). Productivity increases when more output is made with the same number of inputs, or when the same production is achieved with fewer inputs. Typically, increased productivity comes from investment in better technology and equipment for workers or better management practices.
There are two key types of productivity being measured:
1. Labour Productivity
2. Multifactor Productivity (MFP)
Historical Trends
Focusing on Australia’s Mining Boom post GFC, it is clear how labour productivity growth declined steadily close to zero. This can be explained by China’s dwindling demand for Australian mineral exports during the period. Following the initial post-GFC stimulus in China, which had temporarily boosted demand for commodities, growth began to moderate as China pivoted from an investment-heavy model towards a consumption-led economy. As a result, the rapid expansion in Australia’s mining sector, which had previously driven strong labour productivity gains through high output relative to labour input, began losing momentum.
As of early 2025, Australia’s productivity performance has become a growing concern. Labour productivity, measured as GDP per hour worked, fell by 1.2% over the year to December 2024, marking the second consecutive annual decline.
This drop is largely driven by a shift in employment toward lower-productivity sectors such as hospitality and care services, which, despite capital deepening, tend to generate lower returns on both labour and capital inputs. At the same time, multifactor productivity growth has also slowed, contributing very little to overall productivity. This suggests that the issue is not merely about labour input but reflects broader structural challenges facing the Australian economy.
Key causes of a productivity slump
A dramatic increase in immigration
Australia has experienced one of the fastest population growth rates among developed nations, largely driven by high levels of immigration. While immigration can stimulate economic growth by expanding the labour force, it has also contributed to “capital shallowing,” where the amount of capital, such as machinery, infrastructure, and technology, available per worker does not keep pace with the growing workforce.
This imbalance reduces labour productivity because workers have less capital to work with, leading to lower output per hour and slower per capita GDP growth.
An aging population
Australia’s population is aging, with a rising proportion of older workers and retirees. This demographic shift tends to reduce the overall labour force participation rate and slow productivity growth. Older workers may have lower adaptability to new technologies and innovation, which can dampen productivity gains.
Additionally, an aging population increases demand for health and social services, sectors that have recently experienced significant productivity declines. For example, healthcare and social assistance productivity fell by 13.5% over 18 months, even as employment in the sector grew by 28%. The growing number of retirees also means fewer workers are available to support a larger non-working population, placing further pressure on productivity to maintain living standards.
A shift towards lower-productivity sectors
The Australian economy has undergone a structural transformation, with a shift away from high-productivity sectors like manufacturing and mining toward service-oriented and non-market sectors such as healthcare, social assistance, and public administration.
These sectors generally exhibit lower productivity growth, and in 2025, the strongest industries were the non-market sectors of education, public administration, and health, all of which saw significant growth, reflecting the ongoing reliance on government spending to prop up the economy. By contrast, Australian manufacturing is in terminal decline, falling to only around 5% of the economy in 2024, and is now the lowest manufacturing share in the OECD. This decline has been intensified by soaring energy costs on the East Coast, which have driven up input prices and led to widespread closures and downsizing among manufacturers.
So, what does this mean for the Australian Market?
Slowing economic growth
In 2025, Australia’s productivity decline is directly weighing on its economic growth potential. With the recent decrease in productivity, even with rising employment and hours worked, the economy is producing less output per unit of labour. As a result, Australia’s overall capacity to grow sustainably has weakened, contributing to subpar GDP growth forecasts in the near term of between 1.9-2.1%. For investors, slower growth means potentially lower returns on investments tied to economic expansion, such as equities and real estate.
Weaker wage growth and household spending
Productivity growth is a key driver of real wage increases. With productivity stagnant or declining, wage growth slows. This reduces household income growth, limiting consumer spending, the biggest part of Australia’s GDP. Slower consumption growth then feeds back into slower overall economic activity. This means, weaker consumer spending can reduce corporate profits, affecting dividend payouts and stock valuations in consumer-driven sectors.
Public sector and infrastructure spending pressure
With weak productivity limiting private sector growth, the government often steps in with increased spending to support the economy. While public investment can boost activity in the short term, it is not a substitute for sustained productivity growth, which is critical for long-term improvements in living standards.
In May 2025, the government announced key initiatives, including a $900 million National Productivity Fund to encourage state reforms for competition and efficiency, significant investments in infrastructure and housing reforms, such as zoning changes to increase housing supply, and targeted funding for AI and innovation across states. These efforts aim to alleviate bottlenecks and stimulate economic activity, but their long-term impact depends on successful implementation and complementary private sector engagement.
Investors in infrastructure and government bonds may benefit in the short term from increased public spending, but long-term private sector investment opportunities could remain constrained if productivity challenges persist.
Competitiveness and trade impacts
Slower productivity growth will make Australian industries less competitive internationally, potentially reducing export growth. Given Australia’s reliance on trade, this impacts the broader economy’s growth potential and resilience to global shocks.
In May 2025, Australia’s productivity growth has averaged just 0.2% annually over the past decade, one of the lowest rates among advanced economies. This stagnation has led to increased production costs, particularly in energy and labour, eroding the competitiveness of Australian exports. For investors, reduced export competitiveness can mean lower profits for export-oriented companies and increased volatility in related markets.
Restoring productivity for sustainable growth
Australia’s recent productivity slump reflects a combination of structural, demographic, and sectoral shifts that have profound implications for the economy’s long-term health. While labour and multifactor productivity once underpinned strong growth, these measures have weakened significantly in recent years, weighed down by rapid immigration outpacing capital investment, an aging workforce, and a shift toward lower-productivity service sectors.
The consequences are clear: slower economic growth, weaker wage gains, constrained consumer spending, and diminished international competitiveness. Although the federal government has responded with targeted reforms and investments to stimulate innovation and efficiency, sustained productivity recovery will require a coordinated effort across public and private sectors.
For policymakers, businesses, and investors alike, confronting these challenges is essential to ensuring Australia’s future prosperity and economic resilience.
Kurtis Castorina
Investment Strategy Analyst, Your Future Strategy
References
[1] Do we really have a productivity problem? How wage restraint and a mining boom helped kill our productivity – ABC News
[2] Productivity | Explainer | Education | RBA
[3] Estimates of Industry Multifactor Productivity, 2023-24 financial year | Australian Bureau of Statistics
[4] Research Note: Unpacking Australia’s poor productivity performance | Ai Group
[5] Key Australian industry indicators – May 2025
[6] How Australia killed it’s manufacturing industry – MacroBusiness
[7] Australia’s economy is stuck in the emergency lane – MacroBusiness
[8] Outlook | Statement on Monetary Policy – May 2025 | RBA
[9] Economy | Budget 2025–26
[10] Australia is trapped in a productivity death spiral – MacroBusiness