Telling the story

The attached charts from the Productivity Commission and Treasury tell the story of the impact of declining terms of trade and population ageing on Australia’s future economic growth prospects.

The boost from rising terms of trade

In the 1990s productivity growth (blue area in Chart 1) was the dominant source of growth in Gross National Income per person, but in the 2000s productivity growth ebbed away. A big increase in the terms of trade (grey area) from the China minerals boom masked the fall-off in productivity growth.

Declining terms of trade

In the 10 years 2012-2022 the terms of trade are forecast to decline to such an extent that they will detract heavily from income growth (Chart 2). If labour productivity growth remains only at its weak rates of the last decade or so, growth in Gross National Income per person could fall to its lowest levels in at least 50 years.

Population ageing

The effect on income growth of declining terms of trade will be exacerbated by lower rates of labour utilisation, reflecting the ageing of the population (the red area below the line in Chart 2 above).

What if productivity growth recovers to its long-term average?

Even if productivity growth increases to its long-term average of 1.6 per cent, the picture doesn’t get much better (Chart 3).

What’s needed to achieve Australia’s long-run growth rate?

Faced with declining terms of trade and population ageing, to achieve our long-term historical growth rate in Gross National Income per person we would need productivity to grow much faster than it has ever done (Chart 4).

What this means

We need to go flat out to boost productivity growth, but even then, in the absence of a new boost to our terms of trade, we will need to get used to slower growth in income per person.