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Beyond the boom: Australia's productivity imperative | McKinsey
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mdc-u-grid-col-lg-start-3 mdc-u-grid-col-lg-end-8 mdc-u-ts-9"><span> </span><span class="AuthorsByLine_mck-c-authors-byline__author__XdrlD"><span class="AuthorsByLine_mck-c-authors-byline__no-wrap__Ced0j">Charlie Taylor<!-- --> </span></span><span class="AuthorsByLine_mck-c-authors-byline__author__XdrlD"><span class="AuthorsByLine_mck-c-authors-byline__no-wrap__Ced0j"><a data-component="mdc-c-link" href="/our-people/chris-bradley" class="mdc-c-link-inline___7DRrt_2734c4f mdc-c-link-inline--secondary___YKoOK_2734c4f"><span class="mdc-c-link__label___Pfqtd_2734c4f">Chris Bradley</span></a> </span></span><span class="AuthorsByLine_mck-c-authors-byline__author__XdrlD"><span class="AuthorsByLine_mck-c-authors-byline__no-wrap__Ced0j">Richard Dobbs<!-- --> </span></span><span class="AuthorsByLine_mck-c-authors-byline__author__XdrlD"><span class="AuthorsByLine_mck-c-authors-byline__no-wrap__Ced0j">Fraser Thompson<span> </span></span></span><span class="AuthorsByLine_mck-c-authors-byline__author__XdrlD"><span class="AuthorsByLine_mck-c-authors-byline__no-wrap__Ced0j">Daniel Clifton</span></span></div><div class="mdc-u-grid-col-md-start-8 mdc-u-grid-col-md-end-12 mdc-u-grid-col-lg-start-8 mdc-u-grid-col-lg-end-11 ArticleContent_mck-c-article-content__share-tools__kWRRw"></div></section><section class="mdc-u-grid mdc-u-grid-col-md-12 mck-u-animation-blur-in-400"><div class="mdc-u-grid-col-md-start-2 mdc-u-grid-col-md-end-12 mdc-u-grid-col-lg-start-3 mdc-u-grid-col-lg-end-11"><div data-component="mdc-c-description" class="mdc-c-description___SrnQP_2734c4f mdc-u-ts-5"><div class="mck-u-links-inline">An outsized boom in the natural-resources sector has produced strong income growth for Australia, but its fundamentals have been weakening. Building a more balanced and resilient economy that can withstand a potential slowdown depends on getting back to the basics of productivity growth.</div></div></div></section><main data-layer-region="article-body" class="mdc-u-grid mdc-u-grid-gutter-xxl"><div class="mdc-u-grid mdc-u-grid-col-1 mdc-u-grid-col-md-12"><div class="mdc-u-grid-col-md-start-2 mdc-u-grid-col-md-end-12 mdc-u-grid-col-lg-start-3 mdc-u-grid-col-lg-end-11"><div class="mdc-o-content-body mck-u-dropcap"><div data-component="mdc-c-module-wrapper" data-module-theme="default" data-module-background="transparent" data-module-category="" class="DownloadsSidebar_mck-c-downloads-sidebar__iFmyt mck-o-xs-right-span"><div data-layer-region="downloads-right-rail"><h3 data-component="mdc-c-heading" class="mdc-c-heading___0fM1W_2734c4f mdc-c-heading--title___5qyOB_2734c4f mdc-c-heading--border___K8dj3_2734c4f"></h3><div><div data-component="mdc-c-link-container" class="mdc-c-link-container___xefGu_2734c4f"><a data-component="mdc-c-link" href="/~/media/mckinsey/featured insights/asia pacific/australia productivity imperative/mgi_august_2012_australia_executive_summary.pdf" class="DownloadsSidebar_mck-c-downloads-sidebar__download-link__fPqFQ mdc-c-link___lBbY1_2734c4f" target="_blank" data-layer-event-prefix="Download Link" data-layer-action="click" data-layer-report-type="" data-layer-file-name="mgi_august_2012_australia_executive_summary" data-layer-report-name="mgi_august_2012_australia_executive_summary>"><span data-component="mdc-c-icon" class="mdc-c-icon___oi7ef_2734c4f mdc-c-icon--size-md___yi5fA_2734c4f mck-download-icon"></span><span class="mdc-c-link__label___Pfqtd_2734c4f"> (PDF-1 MB)</span></a><a data-component="mdc-c-link" href="/~/media/mckinsey/featured insights/asia pacific/australia productivity imperative/mgi_august_2012_australia_full_report.pdf" class="DownloadsSidebar_mck-c-downloads-sidebar__download-link__fPqFQ mdc-c-link___lBbY1_2734c4f" target="_blank" data-layer-event-prefix="Download Link" data-layer-action="click" data-layer-report-type="" data-layer-file-name="mgi_august_2012_australia_full_report" data-layer-report-name="mgi_august_2012_australia_full_report>"><span data-component="mdc-c-icon" class="mdc-c-icon___oi7ef_2734c4f mdc-c-icon--size-md___yi5fA_2734c4f mck-download-icon"></span><span class="mdc-c-link__label___Pfqtd_2734c4f"> (PDF-1 MB)</span></a></div></div></div></div> <p>Australia has been riding the wave of Asia’s economic growth, supplying coal, iron ore, and minerals to meet unprecedented demand in China and other emerging markets. As commodity prices spiked in recent years, the country has attracted a flood of investment into its mines, processing plants, pipelines, and ports. More money has been invested in Australian resource projects in the past 5 years than in the previous 20. </p> <p>Asia’s economic and demographic trends point to sustained demand in the decades ahead, but growth fuelled by demand for natural resources carries risk. The McKinsey Global Institute (MGI) report <em>Beyond the boom: Australia’s productivity imperative</em> finds that “one-off” factors—including favorable terms of trade and an investment surge—have driven half of the country’s recent growth, obscuring the truth about its overall economic health. </p> <p>The magnitude of Australia’s resource boom belies some weakening fundamentals. Since 2005, the country has enjoyed 4.1 percent annual gains in income. But growth in labor productivity has fallen to just 0.3 percent. Capital productivity is now the biggest drag on income growth. </p> <p> <div data-component="mdc-c-module-wrapper" data-module-theme="default" data-module-background="transparent" data-module-category="" class="mck-c-inline-module-container mck-o-md-center"><div class="mdc-u-grid mdc-u-grid-gutter-lg mdc-u-grid-col-sm-1 mdc-u-grid--align-start mdc-u-mb-3 GenericItem_mck-c-generic-item__sGwKL"><div data-component="mdc-c-content-block" class="mdc-c-content-block___7p6Lu_2734c4f mdc-u-grid-gutter-xs GenericItem_mck-c-generic-item__content__gq1m0"><div class="mck-c-eyebrow mdc-u-ts-10"><span>Exhibit </span></div><div data-component="mdc-c-content-block" class="mdc-c-content-block___7p6Lu_2734c4f"><h5 data-component="mdc-c-heading" class="mdc-c-heading___0fM1W_2734c4f"><div>Productivity performance, weaker than in previous eras, is now the biggest drag on income growth. </div></h5></div></div></div><div class="mck-u-inline-module-border-top mck-u-inline-module-border-bottom"><picture data-component="mdc-c-picture" class="Exhibit_mck-c-exhibit__image__pyIDm"><source media="(min-width: 768px)" srcSet="/~/media/mckinsey/featured%20insights/asia%20pacific/australia%20productivity%20imperative/svg_web_mgi_australia_ex.svgz?cq=50&cpy=Center"/><img alt="svg_WEB_MGI_Australia_ex" src="/~/media/mckinsey/featured%20insights/asia%20pacific/australia%20productivity%20imperative/svg_web_mgi_australia_ex.svgz?cq=50&cpy=Center" loading="lazy"/></picture></div><div class="mck-u-sr-only"></div></div> </p> <p>MGI outlines four potential scenarios for the future and finds that growth is likely to slow down, even in the best possible outcome. But in the worst-case scenario—if terms of trade move back toward their long-term average, some capital projects stall, and productivity growth remains low—income growth could stagnate at just 0.5 percent a year until 2017. </p> <p>Australia can’t control commodity prices and global demand for resources, but by reversing its slide in productivity, it can take steps to create a softer landing when the boom eventually subsides. The report identifies four sectors—defined by their proximity to the resource boom and their exposure to trade competition—and pinpoints the major challenges for each of them. Successfully addressing these areas could raise national income by up to AU $90 billion (about US $95 billion) a year by 2017. </p> <ul class="bullListSep"> <li><strong>Resource sectors: Getting capital productivity right.</strong> Australia is less than halfway through the capital boom, with AU $443 billion in investment still to come in the resource sector. Major capital projects are prone to inefficiencies and overruns, but the country has an opportunity to boost its capital productivity by up to 30 percent if firms emphasize a top-level focus on value, adopt a best-practice “tool kit,” and assemble project teams with superior execution skills. </li> <li><strong>Resource-rider sectors: Improving efficiency.</strong> Transport, utilities, professional services, and other resource-related sectors have grown dramatically because of their links with the mining and energy boom. Yet at the same time, their labor productivity has fallen dramatically as well. Stakeholders must find ways to develop new infrastructure more cost effectively. Additionally, a more integrated cross-sector approach to resource productivity can reduce the need for some expensive new projects. </li> <li><strong>Local services: Implementing microeconomic reform.</strong> Sectors such as retail trade and telecommunications have been largely unaffected by the resource boom. They have posted solid productivity gains but tend to lag behind international benchmarks. Australia can close the gap through a renewed focus on microeconomic reforms that streamline regulations, encourage innovation, and promote competitive markets. </li> <li><strong>Manufacturing: Creating a foundation for long-term competitiveness.</strong> Like other developed economies, Australia has seen its manufacturing base erode. Improvement will depend on cost efficiencies, particularly the neglected area of management quality; higher labor mobility; and a shift to innovative manufacturing, which offers the best long-term potential for competitiveness. </li> </ul></div><div class="container-placeholder"></div></div></div></main></div><div data-component="mdc-c-module-wrapper" data-module-theme="light" data-module-background="lightest-grey" data-module-category="StandalonePromo" class="RelatedArticle_mck-c-article-related__GGA76 mck-u-screen-only" data-layer-region="related-articles"><div class="mdc-o-container__wrapper is-wrapped mdc-u-spaced-mobile"><h5 data-component="mdc-c-heading" class="mdc-c-heading___0fM1W_2734c4f mdc-c-heading--title___5qyOB_2734c4f mdc-u-align-center">Related Articles</h5><div class="mdc-u-grid mdc-u-grid-col-md-3 RelatedArticle_items-container__s2uD0"><div class="mdc-u-grid mdc-u-grid-gutter-lg Card_card__diA2r Card_hover-effect__RGb9b"><div class="Card_wrapper-image__8b4P6"><a data-component="mdc-c-link" href="/featured-insights/employment-and-growth/six-myths-about-trade" class="mdc-c-link___lBbY1_2734c4f"><picture data-component="mdc-c-picture" class="Card_wrapper-image__8b4P6"><style>.picture-uniqueKey-tradi-0 { aspect-ratio: 16/9 }</style><img alt="trmy12_frth" class="picture-uniqueKey-tradi-0" src="/~/media/mckinsey/featured%20insights/employment%20and%20growth/six%20myths%20about%20trade/trmy12_frth.jpg?cq=50&mw=767&car=16:9&cpy=Center" loading="lazy"/></picture></a></div><div class="Card_wrapper-text__U6Y3k"><div data-component="mdc-c-content-block" class="mdc-c-content-block___7p6Lu_2734c4f Card_content-block__pF6Z1"><span>Report - 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Building a more balanced and resilient economy that can withstand a potential slowdown depends on getting back to the basics of productivity growth."}},"sEODescription":{"value":""},"displayDate":{"jsonValue":{"value":"2012-08-01T00:00:00Z"}},"body":{"value":"[[DownloadsSidebar]] \u003cp\u003eAustralia has been riding the wave of Asia\u0026rsquo;s economic growth, supplying coal, iron ore, and minerals to meet unprecedented demand in China and other emerging markets. As commodity prices spiked in recent years, the country has attracted a flood of investment into its mines, processing plants, pipelines, and ports. More money has been invested in Australian resource projects in the past 5 years than in the previous 20. \u003c/p\u003e\n\u003cp\u003eAsia\u0026rsquo;s economic and demographic trends point to sustained demand in the decades ahead, but growth fuelled by demand for natural resources carries risk. The McKinsey Global Institute (MGI) report \u003cem\u003eBeyond the boom: Australia\u0026rsquo;s productivity imperative\u003c/em\u003e finds that \u0026ldquo;one-off\u0026rdquo; factors\u0026mdash;including favorable terms of trade and an investment surge\u0026mdash;have driven half of the country\u0026rsquo;s recent growth, obscuring the truth about its overall economic health. \u003c/p\u003e\n\u003cp\u003eThe magnitude of Australia\u0026rsquo;s resource boom belies some weakening fundamentals. Since 2005, the country has enjoyed 4.1 percent annual gains in income. But growth in labor productivity has fallen to just 0.3 percent. Capital productivity is now the biggest drag on income growth. \u003c/p\u003e\n\u003cp\u003e\n[[exhibit 1]]\n\u003c/p\u003e\n\u003cp\u003eMGI outlines four potential scenarios for the future and finds that growth is likely to slow down, even in the best possible outcome. But in the worst-case scenario\u0026mdash;if terms of trade move back toward their long-term average, some capital projects stall, and productivity growth remains low\u0026mdash;income growth could stagnate at just 0.5 percent a year until 2017. \u003c/p\u003e\n\u003cp\u003eAustralia can\u0026rsquo;t control commodity prices and global demand for resources, but by reversing its slide in productivity, it can take steps to create a softer landing when the boom eventually subsides. The report identifies four sectors\u0026mdash;defined by their proximity to the resource boom and their exposure to trade competition\u0026mdash;and pinpoints the major challenges for each of them. Successfully addressing these areas could raise national income by up to AU $90 billion (about US $95 billion) a year by 2017. \u003c/p\u003e\n\u003cul class=\"bullListSep\"\u003e\n \u003cli\u003e\u003cstrong\u003eResource sectors: Getting capital productivity right.\u003c/strong\u003e Australia is less than halfway through the capital boom, with AU $443 billion in investment still to come in the resource sector. Major capital projects are prone to inefficiencies and overruns, but the country has an opportunity to boost its capital productivity by up to 30 percent if firms emphasize a top-level focus on value, adopt a best-practice \u0026ldquo;tool kit,\u0026rdquo; and assemble project teams with superior execution skills. \u003c/li\u003e\n \u003cli\u003e\u003cstrong\u003eResource-rider sectors: Improving efficiency.\u003c/strong\u003e Transport, utilities, professional services, and other resource-related sectors have grown dramatically because of their links with the mining and energy boom. Yet at the same time, their labor productivity has fallen dramatically as well. Stakeholders must find ways to develop new infrastructure more cost effectively. Additionally, a more integrated cross-sector approach to resource productivity can reduce the need for some expensive new projects. \u003c/li\u003e\n \u003cli\u003e\u003cstrong\u003eLocal services: Implementing microeconomic reform.\u003c/strong\u003e Sectors such as retail trade and telecommunications have been largely unaffected by the resource boom. They have posted solid productivity gains but tend to lag behind international benchmarks. Australia can close the gap through a renewed focus on microeconomic reforms that streamline regulations, encourage innovation, and promote competitive markets. \u003c/li\u003e\n \u003cli\u003e\u003c!-- END OF UL WITH LI'S THAT HAVE PADDING BOTTOM AND NO STYLE IN THE HEAD--\u003e\u003cstrong\u003eManufacturing: Creating a foundation for long-term competitiveness.\u003c/strong\u003e Like other developed economies, Australia has seen its manufacturing base erode. 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