Weekly economic briefing: Productivity growth, where art thou?

The Weekly Economic Briefing is written by two senior Deloitte Economists, David Rumbens from Deloitte Access Economics in Australia and Ian Stewart Deloitte’s Chief Economist in the UK. They provide a personal view on topical financial and economic issues. Subscribe to receive the Weekly Economic Briefing in your inbox!

In this week’s blog:

Australian economic briefing
UK economic briefing
International economic briefing

Australian economic briefing by David Rumbens

This section of the briefing provides a snapshot of key economic data and issues of relevance to Australia.

Productivity growth, where art thou?

Among rich countries, there has been a clear slowdown in productivity growth over the past few decades (see Chart 1). In the United States, United Kingdom and many countries, productivity growth in recent years has been – and remains – extraordinarily low. In Australia, the productivity trends have been better in recent years than in many other advanced economies. The latest productivity statistics, recently released by the Australian Bureau of Statistics, confirm that over the current (still incomplete) economic cycle since 2007-08, labour productivity growth has averaged 2.2% per year, only slightly below the average between 1973-74 and 2007-08 of 2.3%.

Chart 1: Labour productivity in the US and Australia, ten-year rolling average growth

Source: Bergeaud, A., Cette, G. and Lecat, R. (2016)

But that is no cause for complacency. A large part of Australia’s better productivity performance in recent years reflects the huge investment cycle in the mining sector (see Chart 2). As mining companies ploughed billions of dollars’ worth of capital into boosting mining capacity, this depressed measured productivity – these mining projects took years to complete, used a lot of labour, and weren’t producing extra output for a long time. But in recent years, as this massive increase in the stock of mining capital has come online, and mining production has surged, measured productivity has increased with it. But that boost to productivity growth will wash out soon, once the current pipeline of mining and energy projects are completed.

Chart 2: Productivity level in the mining sector (quality adjusted hours worked basis)

Source: Australian Bureau of Statistics

More broadly, the long-run trend in Australia’s productivity growth has been declining, similar to the global picture.

For an economy, low productivity growth is like a person with an iron deficiency. It’s slow, it’s lethargic, even if it doesn’t realise why. For the economy it means lower economic growth, and it means lower wage growth.

As we highlighted in our latest quarterly Business Outlook publication (entitled ‘Jobs now, wages later’), wage growth in Australia remains around record lows. Growth in labour productivity is closely linked with growth in wages over time.

While we can relish Australia’s recent better productivity performance against many other advanced economies, we shouldn’t celebrate too loudly. Australia, being a capital-importing economy, has become largely dependent on the rest of the world for technological innovation and long-run productivity growth. That productivity growth in most other advanced economies has slowed markedly over the past decade is therefore a concern.

So why is productivity growth so low globally? There are a number of theories, from mismeasurement, to the impact of globalisation, to a fall in productivity-boosting investment.

Research by the OECD and the Bank of England suggests that highly productive businesses are still improving their productivity as rapidly as ever. That is, firms with an already-high level of productivity are still raising their productivity levels at a solid rate. But low-productivity firms are raising their productivity more slowly. Put another way, the ‘trickle down’ of productivity-enhancing technologies and business practices from highly productive firms to lowly productive firms is not happening the way it used to.

Where to from here? The drivers of productivity – a mix of good decisions (by governments and businesses) and good luck (among the innovators) – are difficult to forecast. Government policy can have some positive impact, and the Productivity Commission, for instance, has not been shy about telling the federal and state governments what it should do to boost productivity.

But the far bigger driver of long-term productivity growth is technological innovation. On this front, there are both optimists and pessimists. Doomsayers argue that we’ve essentially run out of useful things to invent. Optimists think we’re at the beginning of a new era of technological innovation. We won’t know until it happens – or doesn’t happen – but let’s hope the optimists are at least partly right.


For more information on the Australian brief, please contact co-authors David Rumbens and Craig Michaels.


UK economic briefing by Ian Stewart

A personal view from Ian Stewart, Deloitte’s Chief Economist in the UK. Subscribe to and view previous Monday Briefings at: http://blogs.deloitte.co.uk/mondaybriefing/

Assessing America’s tax reform

  • Last December the US Congress passed a bill overhauling the tax code, the first major tax reform since 1986. The federal corporate tax rate was permanently slashed from 35%, the highest rate of any large, developed country, to 21%. The tax cut is partly financed by a one-off levy on profits retained overseas by US corporations, at 15.5% on cash and 8% on other investments. Payment of this levy is spread over eight years and applies whether or not cash is repatriated back to the US. The bill also lowered the income tax burden for most American workers.
  • The tax reforms target the enormous cash piles that US corporates have kept overseas to avoid paying higher US taxes. Ratings agency Moody’s estimates that US non-financial companies hold about $1.4tn in offshore cash and liquid investments, constituting 72% of their total cash holdings at the end of 2017. Much of this is concentrated in the hands of a small number of firms. Under the reforms technology firms are likely to bear significant tax charges, with Apple, Microsoft, Google’s parent Alphabet, Cisco Systems and Oracle being the top five overseas holders of cash.
  • Supporters of the reform hope that the tax on overseas cash will lead corporates to repatriate huge amounts of money to the US, causing a surge in capital expenditure and job creation. Previous experience point to a more muted response.
  • In 2004, the Bush administration implemented a one-off tax holiday, allowing corporates to repatriate overseas earnings on which they paid just a 5% tax. A 2011 US Senate study concluded that the policy was ineffective. Corporations brought back $312bn held overseas but there was no corresponding boost in domestic investment or R&D spending. The top 15 beneficiaries of the holiday reduced their total US employment over the next few years. Instead stock repurchases and executive compensation increased. The main beneficiaries were pharmaceutical and technology companies, a relatively narrow section of US multinationals.
  • This time round it looks likely to be a similar story. When asked in a recent Bank of Merrill Lynch survey about how they would use repatriated cash major US multinationals identified paying down debt, repurchasing shares and undertaking M&A as the top three priorities; increasing capital spending was in fourth place and raising dividends in fifth. Of course some of that increased dividend income will flow to the real economy, but more indirectly, to different sectors and with different effects, than an increase in corporate investment.
  • A bigger boost to activity seems likely to come more from the reduction in the rate of corporate tax and an immediate write-off against tax for capital expenditure incurred before 2022. Unlike the taxation of overseas cash, which effect a relatively small number of generally large businesses, cutting the rate of corporation tax benefits the whole corporate sector. Some businesses, including Walmart, AT&T and Bank of America have announced wage rises or bonuses in response to the tax cuts.
  • The new corporate tax rate will put the US well below the weighted average for G7 and G20 countries and could encourage multinationals to increase levels of investment in the US.
  • The third aspect to the tax reform, which has perhaps received less attention, is the lowering of income tax. A study by the Tax Policy Centre shows that 80% of US taxpayers would receive a tax cut in 2018 – averaging about $2,100. Higher income earners are the biggest beneficiaries, although the study shows that every quintile of wage earners will see a boost to incomes this year with the lowest being a 0.8% raise for those in the bottom quintile.
  • Assessments of the macroeconomic impact of the tax cuts vary. But the general expectation is for a probably small boost to GDP growth and a sharply increased federal budget deficit. The tax cutting package runs two risks.
  • The first is that tax cuts could over-stimulate a healthy economy which is already showing signs of inflationary pressures. The head of Goldman Sachs, Lloyd Blankfein, made exactly this point last week. The US unemployment rate stands at just 4.1% and the economy is showing good growth. The Federal Reserve is well into the tightening phase of the monetary cycle. It has raised interest rates by 125bp from their post-crisis lows and has signalled at least a further 75bp in rate rises for this year. If tax cuts seem to be fuelling inflation the Fed could speed up the pace of tightening.
  • The second risk relates to the government borrowing. The Congressional Budget Office, the official deficit watchdog, estimates that the US government will need to borrow a further $1.5 trillion over ten years to fund the tax cuts.
  • The US seems to be heading into some of its largest budget deficits outside of war time and recessions. The Bipartisan Policy Centre, an independent think tank, estimates that following a recent Congressional agreement to avert a shutdown, the US deficit could more than double to 5.7% of GDP in 2019. This is a very large deficit to be running so late in the economic cycle. It would leave the US with the largest budget deficit, as a share of GDP, of the G7 group of major industrialised nations. Borrowing on this scale reduces the headroom for policymakers to use debt-financed public spending to counter the effects of a future downturn.
  • A combination of rising interest rates and a widening US budget deficit could push yields on US government bonds higher. Earlier this month jitters about inflation and rising bond yields triggered stock market gyrations. America is adding a major fiscal stimulus to an expansion that is mature and when inflationary pressures seem to be building. The short-term boost to growth could well bring with it higher levels of volatility.


The FTSE 100 ended last week down 2.9%, at 7,295 as equities regained their poise globally following the sharp sell off the previous week.


International economic briefing by Ian Stewart

Economics and business

  • Cyril Ramaphosa replaced Jacob Zuma as South African President after 9 years in charge and following weeks of turmoil
  • The US Senate rejected a bipartisan immigration plan, a major setback to reaching a deal on unauthorised immigrants
  • UK inflation was unchanged at a near five-year high of 3% in January
  • UK wages are set to rise at 3.1% this year, outstripping inflation, and at their fastest pace in a decade, according to a Bank of England survey
  • US inflation came in above expectations rising by 2.1% in the year to January
  • The Trump administration is mulling action against imports of aluminium and steel as part of a national security crackdown which could provoke an angry response from China, the EU and other nations
  • The Chinese government is reported to be preparing for a trade war with the US by planning counter measures should the US impose punitive tariffs
  • UK retail sales growth came in well below expectations in January, further evidence of a squeeze on consumer spending
  • In the UK only 25% of people born in the late 1980s owned a home by the age of 27, compared with 33% of those born earlier in the decade, the IFS reports
  • Labour’s Shadow Chancellor, John McDonnell, has suggested that some investors in private finance initiatives might not get any compensation if contracts are renationalised under a Labour government
  • Unilever, the world’s second-biggest marketing spender threatened to pull its advertising from Google and Facebook if they foster hate, “create division” or fail to protect children
  • Uber’s new chief executive Dara Khosrowshahi announced plans to expand its offering into buses, bikes and all forms of transportation
  • People who sleep fewer than six hours a night are 2.4% less productive than those that get between 7-9 hours, according to a Rand corporation report
  • Bitcoin mining is set to overtake households as the larger consumer of energy in Iceland, according to local energy firm HS Okra
  • Amazon announced plans to create 2,000 jobs in France this year
  • Cisco announced $25bn of share buybacks, the first large tech firm to do so following the announcement of the US tax cuts
  • Portugal’s economy grew by its fastest pace in 17 years last year, expanding by 2.7%
  • A BofA Merrill Lynch survey showed that 70% of fund managers think markets are in “late cycle” territory, suggesting a retreat out of riskier assets
  • The US is on track to become the world’s largest oil producer by 2019, according to the IEA
  • Lidl is to create 700 jobs in the UK as part of its plan to open over 50 new stores and regenerate 30 existing shops
  • Several top US universities have added classes about Bitcoin and the underlying technology blockchain in a sign of the interest around the topic

Brexit and European politics

  • Emmanuel Macron, the French president, said he would seek to create his own group of EU parliamentarians to challenge the “incoherent” established parties in the 2019 elections
  • Brussels is urging EU leaders to consider options such as targeting corporate tax receipts to fill the €15bn annual budget hole after Brexit
  • Ireland said it is preparing for the “inevitability” of border controls after Brexit
  • In a vote of confidence in post-Brexit Britain US banking group Citi announced their intention to create a new UK-based fintech innovation centre
  • The British fruit grower Haygrove is moving some of its raspberry and blueberry-growing business to Yunnan province in China because of concerns about the availability of migrant labour after the UK’s exit from the EU
  • The head of Germany’s Social Democrats, Martin Schulz, has resigned to ease preparations for a coalition government with Angela Merkel’s conservatives

And finally…

A study has found that the concentration of four to six-year olds improves markedly when children are dressed as superheroes – cape-ability

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