The business investment boom will spark a surge in productivity

Strong business investment lays the foundations for higher productivity, stronger growth and a more resilient Australian economy, writes Stephen Koukoulas.

ECONOMY While negotiating the economic slowdown necessary to reduce the inflation rate towards the Central Bank (RBA) target, there is a shining light in the structure of economic growth: private sector business investment.

In the period until the March quarter of 2026, business investment It rose 10.5% in real terms, the strongest result in nearly five years and the third strongest annual growth rate since 2014.

The good news is that faster growth in business investment is expected in the coming fiscal year, and companies are reporting what they expect from these investments. Investment for Fiscal Year 2026-27 It is 11.6% higher than in the same survey from the previous year.

If realized, this would represent the strongest two-year growth in business investment since 2014 and provide a key boost to economic growth over that timeframe.

This continued strength in business investment will not only be good for GDP growth and maintaining a relatively low unemployment rate, but will also be a huge benefit in terms of productivity. This is why power is so welcome.

One of the key reasons for Australia’s poor productivity performance over the last decade was the earlier collapse in business investment. From the peak in 2013 to the nadir in 2022, business investment fell From 18% to 11.5% of GDP.

The situation was so bad that investment was barely higher than at the low point of the recession in the early 1990s.

Lack of investment in new equipment, machinery, warehouses, hotels, artificial intelligence and other technologies has hindered productivity growth. In general, businesses were not adopting new technology and therefore were losing their competitive advantage.

Business investment has reached 13 percent of GDP from its lowest point in 2022 and will inevitably rise further over the next two years, according to a survey of business sector expectations.

The importance of business investment for productivity and the wider economy can be illustrated by a simple example.

For example, if ten workers were given a pickaxe, a shovel, a wheelbarrow, and a small dump truck and asked to mine iron ore, per capita production would be relatively low.

If for the same ten workers an investment in a few diggers, huge dump trucks and a railway network to the port was made, iron production per capita would increase greatly. This will not be the result of workers working harder, but rather the result of investment in machinery and equipment that makes their jobs easier and, in fact, more efficient.

There is a similar picture in other types of investments. Using technology and the most up-to-date equipment will increase output per worker. In other words, increasing efficiency.

The current boom in business investment is concentrated in data centres, but is also seen in the construction of new warehouses and accommodation in educational facilities.

As these investments come online and begin to provide additional output, the rate of economic growth will increase and the payoff will inevitably be an increase in productivity.

These trends will take some time to develop. The current investment needs to be completed and put into operation. But with a skilled workforce and tens of billions of dollars flowing into highly productive assets, a long-overdue recovery in productivity seems certain.

This is a shining light in an uncertain economic environment with all the negative effects of high interest rates, oil price shock, falling house prices and especially weak consumer confidence.

Stephen Koukoulas is one of Australia’s most respected economists, the former chief economist of Citibank and senior economic advisor to the Australian Prime Minister. You can follow Stephen on Twitter/X @TheKouk and in Bluesky @thekouk.bsky.social.

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