Poor productivity continues to inhibit GDP growth

In an economic update titled Australia in 2016, HSBC Global Research argued that weak productivity growth is restricting the Australian economy and having a significant impact on its long-term GDP numbers.

Research by HSBC indicated that Australia’s potential growth rate has fallen from 3.25 per cent to 2.5-2.75 per cent in the decade leading up to the financial crisis.

“If this lower rate of trend growth is sustained then by 2030 the economy would be 7.5 per cent smaller than it could otherwise have been,” the update stated.

“This is a loss of 7.5 per cent of GDP, or equivalent to two years of no growth (a two-year recession).”

HSBC also said that fiscal repair remains a medium-term challenge for the economy.

“Over the medium term, the budget will need to return to balance, most likely through a combination of spending restraint and higher revenues,” the update said.

Fiscal tightening, during a period of below-trend growth, risks weakening the economy and could therefore be “self-defeating”, HSBC said.

“Finding the right balance of spending cuts and revenue measures that put the budget on a credible path back to surplus will be tricky.”
While the economy faces broad-based challenges as stated above, HSBC concluded that Australia's economic rebalancing nonetheless remains on track.

“The services sectors, including tourism, education, and healthcare, are set to continue to be supported by local and Asian demand, driving further solid jobs and GDP growth,” the update said.

[Related: NAB predicts three Fed rate hikes for 2016]