What is fuelling Australia's productivity crisis

When the productivity roundtable convenes this month in Canberra, lacklustre private sector business investment should be on the agenda.

The Economic Reform Roundtable will be held 19–21 August at Parliament House in Canberra. Led by Treasurer Jim Chalmers, it will bring together business leaders, union officials and the Opposition to discuss ways to boost Australian productivity.

For more than a decade, our low investment intensity has contributed to a slowdown in the growth rate of the economy-wide capital to labour ratio. It has even occasionally sent it backwards as we have slipped from “capital deepening” to “capital shallowing”. This deterioration in the availability of capital per worker has been an important driver of Australia’s disappointing productivity record since the 2010s, which has manifested in subdued per capita GDP growth.

New private business investment accounted for more than 13 per cent of nominal GDP at the start of the current century. As the mining investment boom got underway, that share rose to a peak of around 18 per cent by the December quarter 2012. After the mining boom ended, it fell back, dropping to less than 12 per cent of GDP on the eve of COVID-19. It continued to decline, dropping to a low of around 11 per cent during the early years of the pandemic. Despite a recent modest recovery, as of the March quarter of this year, the ratio stood at only 12.4 per cent of GDP.

Unsurprisingly, shifts in mining investment are an important and relatively straightforward part of the story. From the mid-2000s, commodity prices and Australia’s terms of trade surged due to the rapid industrialisation and urbanisation of the Chinese economy. The resource sector’s response saw mining investment increase from less than two per cent of GDP in the early 2000s to a peak of more than nine per cent by the December quarter 2012. As the boom faded, investment fell back to a little less than three per cent of GDP by late 2019, where it has mostly remained through to the March quarter 2025.

Non-mining business investment is more puzzling. From around 11 per cent of GDP before the mining boom, this had dropped to seven per cent by late 2012. Crowding out via an elevated real exchange rate and surging domestic costs probably explained some of this. But non-mining investment remained subdued even as the mining boom faded, only recovering to around nine per cent of GDP by the March quarter of this year. This weakness in capital spending persisted even though for much of the period between the global financial crisis (GFC) and the pandemic, investment conditions seemed reasonably helpful, with low policy rates implying a correspondingly low cost of capital.

Chronic investment weakness

One step towards solving this puzzle is a recognition that most OECD economies have suffered from ongoing weakness in business investment. Despite a degree of cross-country differences in investment performance, investment growth in every OECD member country is yet to return to its pre-GFC trend. Chronologically, the GFC was the trigger for this widespread weakness, although the mining boom offered Australia a temporary shield.

To explain this international pattern, the June 2025 OECD Economic Outlook cites estimates suggesting that demand weakness explains about one-third of the post-GFC cross-country shortfall in investment relative to pre-GFC trends. Most countries have seen their economic growth rates drop sharply, first after the GFC, and now after the pandemic. This slower growth implies softer current demand — and possibly weaker future demand — reducing investment incentives.

According to the same analysis, a second key driver has been the higher economic and policy uncertainty associated with the post-GFC world economy. When the future economic and regulatory environment is unpredictable, it becomes harder for businesses to lock in costly and hard-to-reverse long-term capital spending plans, increasing the “option value” of waiting. RBA research has found that higher global uncertainty has a large negative effect on Australian business investment, for example.

Measurement problems associated with a continuing shift in the composition of investment towards intangible assets such as software and data might also be at work. Official statistics do not always measure all forms of intangible assets, such as organisational and marketing capital. On one estimate, measurement issues could influence up to half of all intangible investment.

The OECD also reckons corporate behaviour has altered post-GFC. Firms now allocate a smaller share of retained earnings and borrowed funds to capital spending, instead opting to either accumulate financial assets or return funds to shareholders. That might reflect shifts in shareholder preferences towards prioritising dividends and buybacks over long-term investments. Or it could be a response to higher investment costs associated with more planning delays and greater regulatory burdens.

High hurdles

Another piece of the business investment puzzle is that hurdle rates - the rate of return on a project required to justify an investment - remained high despite the cost of capital falling close to record lows in the 2010s. One theory is declining competition (evidenced by rising mark-ups, increased concentration and reduced business dynamism) meant less competitive pressure on firms to reduce hurdle rates or lift investment. Alternatively, Productivity Commission research finds that an increase in the risk premium has deterred firms from investing despite the availability of cheap capital. This could reflect either a rise in risk aversion or an increase in actual risk, with potential drivers including the impact of shocks such as the GFC and the pandemic, along with the higher uncertainty noted above.

To the extent that elevated uncertainty has depressed business investment, the outlook is concerning. The Trump administration has driven international trade policy uncertainty to record highs. Current levels of geopolitical unease are likewise elevated. Mounting fiscal pressures across the developed world plus a growing appetite for populism represent a third source of policy and economic unpredictability. All of which suggests the roundtable will have to work hard to identify measures sufficient to reinvigorate investment and offset potentially powerful headwinds.

This article first appeared under the headline 'Corridors of uncertainty’ in the August 2025 issue of Company Director magazine.