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Boom-Dependent Australia Needs Productivity Jolt, McKinsey Says

Australia’s resource-led investment and the windfall it receives from trade with China mask a slowing in productivity growth that leaves the nation’s economy vulnerable over the long term, a McKinsey Global Institute report showed.

Australia’s high terms of trade, or export prices relative to import prices, and investment accounted for 90 percent of income growth in the past six years, said Chris Bradley, an author of the report and principal at McKinsey & Co. in Sydney. If strong commodity prices and investment don’t continue, A$135 billion ($141 billion) in annual income is at stake, according to the report by the New York-based consultancy.

“Australia can counteract this threat and raise income by almost A$90 billion per year through a concerted effort to restore productivity as the primary engine of Australia’s growth,” Bradley said in a statement. The world’s sixth-richest country measured by gross domestic product per capita has switched from being productivity-driven to being “boom dependent,” he said.

The report echoes a speech by Treasury official David Gruen last month. He said that multifactor productivity -- the output produced from a bundle of labor and capital inputs -- has “scarcely grown” this decade. While the deterioration in performance is partly due to unusual developments in mining and utilities, the slowdown from the 1990s is evident across most industries, he said.

Productivity Reliance

“The gains in Australian living standards of the past decade were more easily achieved than in the 1990s, but they were achieved in ways that cannot be replicated,” Gruen, executive director of the Treasury’s macroeconomic group, said in the July 10 speech. “The gains of the next decade will rely overwhelmingly on improvements in productivity.”

Labor productivity has risen by 0.3 percent a year since 2005, adding A$17 billion in income annually, down from A$57 billion in the 1990s, McKinsey said.

“A focus on capital productivity is a new and important imperative for the Australian economy, due to the sheer size and scale of our pipeline of capital investment,” Bradley said.

McKinsey’s report outlines four possible scenarios for Australia’s income growth: • ‘Paradise’ -- 3.7 percent annual growth if the terms of trade remain high and productivity is restored • ‘Lucky escape’ -- 2.4 percent if the terms of trade stay elevated and productivity stays stagnant • ‘Earned rewards’ -- 1.8 percent per year if the terms of trade fall while productivity is revived • ‘Hangover’ -- 0.5 percent per year, or almost no income growth, if the worst-case scenario occurs for both the terms of trade and productivity.

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