To fix Australia’s persistently sluggish productivity levels, we need to address competition barriers and enable smarter regulation, technology adoption and flexible workforce strategies, says economist Paul Bloxham.

The world economy is at an inflection point. US growth, which has remained surprisingly resilient over the past year, is expected to slow as the effects of tariffs and shifting trade policies flow through, according to Paul Bloxham, Chief Economist at HSBC, who spoke about Australia’s short and long-term economic future at the Australian HR Institute’s National Convention and Exhibition in August this year.

“Asia, particularly China, sits at the heart of the adjustment, with its own structural challenges complicating the picture,” says Bloxham.

This is not an abstract concern for Australia, he says. More than three-quarters of Australia’s goods exports go to Asia, and China has been our largest customer by far for two decades, he adds.

“The extraordinary lift in national income that Australia enjoyed from the early 2000s was directly tied to China’s demand for iron ore, coal and gas to build its cities, factories and infrastructure. 

“When China’s growth model changes, Australia feels it immediately – not through financial markets in New York, but through ships leaving Port Hedland or Gladstone with fewer buyers at the other end.”

This is why the global backdrop matters less in terms of direct trade with the US, and far more through our exposure to Asia’s fortunes, he says. But whether global conditions are benign or volatile, one fact is clear: the biggest economic problem Australia faces is not overseas. It is at home. That problem is productivity.

From global uncertainty to domestic challenge

Bloxham spoke about how the US has caused volatility in economic policy by chopping and changing almost daily. Businesses are left struggling to plan against a backdrop of uncertainty. 

“While American growth has held up due to front-loading of imports and strong tech investment, that resilience will fade as tariffs bite. Normally, slower growth would prompt the US Federal Reserve to cut rates – the circuit breaker for a soft landing. But higher inflation complicates the picture, limiting the Fed’s room to manoeuvre.

“Elsewhere, inflation is lower and central banks are easing. For Australia, though, the direct impact is minimal: only five per cent of our exports head to the US. What matters is China.”

“We can continue to hope the world gifts us higher commodity prices on an ongoing basis. Or we can do the hard work of lifting productivity… The first path is exhausted. The second is our only viable future.” – Paul Bloxham, Economist, HSBC

Bloxham explained that China’s property sector, once the engine of growth, has been in decline since 2021, with investment down more than 50 per cent over five years. 

To compensate, Beijing has poured resources into manufacturing and exports, particularly around the energy transition – electric vehicles, solar panels, batteries and wind power equipment.

“As global trade barriers rise, that strategy faces limits. With demographics turning sharply negative, China needs consumers to spend more. Yet high household saving, falling property values and a shrinking population make that shift difficult.

“For Australia, this matters because China’s boom was metal-intensive. The great gift of the past two decades was an insatiable appetite for iron ore, coal and gas.” 

This meant that resource exports rose in value by 750 per cent between 2003 and 2023, lifting Australia’s national income, boosting tax revenue, supporting government spending and raising household incomes. But Bloxham says that era is now behind us.

The productivity imperative

With the global resource windfall fading, Australia has only one path to sustainably lift living standards: productivity growth.

Unfortunately, recent performance has been “dire”, says Bloxham. Output per hour worked has fallen by around one per cent in the past year, and has been trending downward for two and a half years. 

“Post-pandemic, Australia has had the weakest productivity performance of any advanced economy. On net, productivity is at the same level it was in 2016. That’s effectively no growth in eight years.”

The implications are stark. People are, on average, earning less money. The overall economy is still growing because the population is increasing, but individual living standards are declining. Unless productivity is revived, Australia risks a prolonged period of stagnation.

Bloxham cites several other factors impacting productivity challenges, including:

• Public spending is fuelling growth – but not productivity.
  “Over the past two years, 80 per cent of GDP growth has been publicly funded, largely through big social programs such as the NDIS, aged care and health,” he says. “These are vital services, but they are not productivity-enhancing. Around 75 per cent of new jobs have come from the non-market sector, where output per worker tends to grow slowly.” 
• Private-sector dynamism has faded.
  “Productivity is weak across industries,” he says. “Mining, once a driver of efficiency through heavy capital investment, has seen productivity fall. Investment levels more broadly have been subdued.” 
• Technology adoption has been slow.
  While many Australian businesses have adopted digital tools and artificial intelligence, Bloxham says we are not matching the speed of our global counterparts.
  
  “These technologies are central to lifting efficiency, but require both business investment and regulatory settings that encourage innovation.”

Read HR practitioner’s perspectives on HR’s role in enhancing national productivity levels.

What needs to change?

Bloxham believes productivity doesn’t come from government programs, but instead from businesses innovating, investing and competing.

However, government policies still influence the choices businesses make. He highlights four main priorities:

1. Increase competition. “Firms change not because they want to, but because they must. Competitive pressure forces innovation. Australia’s concentrated markets leave too many businesses insulated from that pressure,” says Bloxham. 
2. Streamline regulation. While environmental safeguards are essential, he says poorly designed rules can slow the energy transition rather than speed it up.
   
   “Housing supply is another example: complex and fragmented planning processes across federal, state and local levels are a key driver of affordability challenges. Industrial relations settings, too, have made it harder for firms to access labour flexibly.
   
   “Complex regulation is one of the things that I get as constant feedback. It’s constraining businesses from making that next investment, or finding that new way of doing things, or being willing to consider doing more investments.” 
3. Accelerate technology adoption. Artificial intelligence and digital tools can deliver productivity gains if embraced at scale. This requires both business investment and supportive policy settings.
   
   “For HR leaders, it also means actively reskilling the workforce and redesigning work to capture these gains,” says Bloxham. 
4. Flexibility in work arrangements.
   
   “Before the pandemic, the push for flexible work was about lifting participation – enabling caregivers, particularly women, to balance responsibilities. The pandemic accelerated this shift by forcing universal adoption of remote work.
   
   “Today, the debate continues. The evidence is mixed on whether working from home or four-day weeks raise or lower productivity. For some workers, flexibility enhances output; for others, it diminishes it. What is clear is that flexible work is here to stay as a larger share of economic activity.”

A cyclical pause, but structural headwinds

In the short term, Bloxham says the cyclical picture is brighter.

“Inflation has come back within the RBA’s two-to-three per cent target band, allowing rate cuts to support growth. The unemployment rate, while rising modestly from its 50-year low of 3.5 per cent to around 4.2 per cent, remains exceptionally low. Growth is set to lift modestly as households respond to lower interest rates.”

But, he warns, this masks the deeper challenge. With productivity low, Australia’s potential growth rate is around two per cent – well below historical norms. Without reform, that will be the ceiling on how fast we can grow, and it will feel sluggish.

“The government has political capital after its re-election and a strong majority. That capital must be used for structural reform, even in the face of vested interests,” he says.

“If we waste this opportunity, the risk is that Australia drifts – reliant on population growth rather than productivity to sustain the economy, with per capita living standards eroding over time.

“The choice is simple. We can continue to hope the world gifts us higher commodity prices on an ongoing basis. Or we can do the hard work of lifting productivity – through competition, smarter regulation, tax reform, technology adoption and flexible workforce strategies. The first path is exhausted. The second is our only viable future.”