Flatlining productivity shows need for budget surgery
Strong economic growth data and conflicts in the Middle East have further increased pressure on Finance Minister Jim Chalmers to deliver meaningful reforms in the May budget and boost Australia’s productivity potential.
Australian Bureau of Statistics data showed gross domestic product growing by 2.6 per cent in 2025; This is the highest rate in nearly three years.
Despite the increase in activity, economists warn that the economy is not in poor health.
BDO chief economist Anders Magnusson said this was likely to make inflation worse, given that growth was not driven by improvements in productivity.
“The publication contains a worrying signal about productivity,” he said.
“GDP per hour worked remained flat in the December quarter, meaning economic growth was driven by Australians working more hours, not because they were producing more with each hour worked.
“Without productivity growth, faster growth translates into inflation rather than sustainably higher standards of living.”
The Central Bank estimates that the fastest growth rate the economy can sustain without increasing inflation will be around two percent per year.
EY chief economist Cherelle Murphy said the only way to increase the capacity of the economy and sustainably raise living standards was to increase investment and increase productivity.
“While there are signs of this, including more optimistic capital spending expectations, further stimulus is needed from improved policies,” he said.
“The national accounts highlight that the government must move forward with efficiency-enhancing reforms in the 2026/27 budget.”
Challenger chief economist Jonathan Kearns said that while productivity was up one per cent from 2025 – higher than the previous year – productivity and the total size of the economy were well below where pre-pandemic trends suggested they should be.
“And it seems like that’s a gap we can’t make up for.”
Recognizing “urgent” economic challenges such as inflation, productivity and global uncertainty, Dr Chalmers said the budget would seek to address them.
“The budget will be very tightly focused on the near-term inflation problem, the long-standing productivity problem, and all this global economic uncertainty triggered by events in the Middle East,” he told reporters on Wednesday.
While higher GDP growth will do little to ease the RBA’s fears about inflation, the underlying details do not point to a sustainable increase in activity.
Westpac senior economist Pat Bustamante said much of the upward surprise in the headline figure was due to volatile items such as stocks.
Household consumption growth was soft at 0.3 percent in the quarter, but the end of electricity rebates and weak tobacco sales muddied the waters.
Given that consumers have such a huge impact on the economy, the RBA will closely monitor household spending data for January, due to be released by the ABS on Thursday, to understand the underlying pulse.
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