• Australian GDP grew by 0.4% in the final quarter of 2018.
• Over the same period, total hours worked rose by 1.1%, meaning that labour market productivity fell by 0.7% during the quarter.
• Productivity is influential on growth in real wages.

Australia’s GDP report was released this week, revealing that the economy grew by 0.4% in the final quarter of last year.

Over the same period, strong employment growth, along with a small increase in hours worked, meant that total hours worked in Australia grew by a rapid 1.1%.

So output rose by 0.4%, nearly three times less than the amount Australians worked.

That meant that labour market productivity went backwards over the December quarter, falling by 0.7%, a result partly driven by weakness in Australian commodity exports.

As seen in the chart below from Capital Economics, over the year, and again reflecting that hours worked grew faster than real GDP, it meant that overall productivity fell by 1%, the largest decline in 22 years.

So why does falling productivity growth matter?

Well, as seen in the next chart, also from Capital Economics, it’s not the best news for anyone looking for a large pay increase any time soon.

As Paul Dales, Chief Australia and New Zealand Economist at Capital Economics, explains: productivity growth is a crucial component in determining what happens with wage growth.

“[The decline in the quarter is] certainly bad news for households as long-term productivity is the single most important driver of living standards as it plays a large role in determining real wages,” he says.

“So the slump in the fourth quarter increases the chances that real wages, which are already stagnating, may soon start going backwards.”

While other factors such as labour market slack, technological advancements and a decreased presence of unionism in Australia are among other factors that influence wage pressures, productivity, as Dales suggests, is pretty influential.

Although productivity growth is weak at present, sitting well below its long-run average, Dales doesn’t expect that trend will last, and predicts that it will likely push higher in the years ahead.

“There are still reasons to believe that productivity growth will be stronger over the next decade than over the past decade,” he says.

“Over the next few years, productivity in the mining sector will probably improve as the large investments in liquefied natural gas (LNG) facilities in recent years deliver dividends.

“More significantly, we are still optimistic that the digital revolution is a truly fungible general purpose technology.

“Via a second wave of advances in areas such as mobile technology, cloud computing and machine learning, we expect it to drive innovation in areas such as medicine, transport, space exploration, communications and physics.”

Given those view, Dales says that productivity growth is likely to average around 1 to 1.5% over the next decade, something that he says bodes well for the economy longer-term.

“While we are more cautious than most on the outlook for the economy over the next couple of years, we are fairly optimistic on the outlook over the next decade,” he says.

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