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Forecasting productivity growth

The report, Forecasting productivity growth: 2004 to 2024, presents forecasts for major sectors of the Australian economy. The report suggests that ICT will remain the main technological driver of productivity growth in Australia over the next 20 years.

One of the reasons for looking at sectoral rather than aggregate productivity forecasts is to highlight expected changes in technologies—a subject that is easier to analyse at the sectoral level. Apart from technological progress, economic growth will also depend on factors such as workplace relations, competitive conditions, social environment, ageing population, rising schooling level of the workforce, overseas economic conditions, oil prices and other possible energy-related problems. While these factors receive some attention in the report, the emphasis is on technological change, mainly because of its critical importance in driving productivity growth and the serious difficulties in forecasting the economic impact of most non-technological factors.

The main interest in the report is on labour productivity growth (see terminology used in productivity analysis). Using the forecasted aggregate labour productivity growth and the expected change in the labour force participation rate, a prediction can be made for the growth in GDP per capita.

The forecasts are derived from the extrapolation of trends in the last two decades, modified intuitively in light of published information about emerging technologies that are likely to become economically important within the next 20 years. Judging from the technology futures literature, the many applications of ICT will remain the main technological driver of productivity growth in the next 20 years.

The technological futures literature suggests that the main advances in ICT in the next 20 years will be in ubiquitous computing and communications pervading into all facets of economic life. In particular, greater use will be made of computerised controllers, electronic sensors and electro-mechanical actuators in manufacturing, mining, construction, agricultural and transport equipment. This will increase machine ‘intelligence’ and multi-functionality and reduce labour requirements. Other emerging productivity enhancing technologies include radio frequency identification devices having wide potential to raise productivity in many areas of storage, distribution, trade and health care.

Some of the major conclusions presented in the report:

  • There is an 80 per cent probability that GDP per capita will grow at an average rate of between 1.26 and 1.83 per cent, per annum between 2004 and 2024. The mean prediction is 1.57 per cent.
  • Labour productivity growth will be particularly strong in sectors that are, or are becoming, heavy users of ICT technologies. These sectors include telecommunications, manufacturing, finance and trade. By contrast, productivity growth in sectors that are less heavily exposed to ICT, such as accommodation and restaurants as well as personal, cultural and recreational services is expected to be relatively low.
  • On the basis of past trends, the report suggests that the main sources of productivity growth will be capital deepening (that is, more capital per worker) combined with technological progress in ICT and to a lesser extent in biotechnology, nanotechnology and material science. Productivity growth will also be strongly influenced by changes in workplace relations, competitive conditions and the social environment.
  • According to Productivity Commission (2005) predictions, population ageing will reduce effective labour supply per capita by four per cent over the next 20 years. Based on this estimate, the DCITA study suggests that as a result of ageing the mean annual rate of growth in real GDP per capita will be reduced from 1.78 per cent to 1.57 per cent during the forecast period.

Falling international ICT prices, by themselves, are not sufficient to ensure strong economic growth. The introduction of new ICT technologies involves an extensive learning process that generates significant knowledge and innovation related externalities to the Australian economy, which are reflected in MFP growth (see section 6). For policy makers, this raises the issue of ensuring an appropriate level of investment in skill formation and ICT related R&D if Australia is to realise the predicted productivity benefits.

Biotechnology is another field that is likely to make a substantial contribution to productivity growth in the coming years. While the impact of ICT through improved automation and information flows affects all sectors of the economy, the impact of progress in biotechnology is more limited, restricted mainly to agriculture, medical care and organic material processing in manufacturing. These sectors cover around 13 per cent of GDP.

The predicted growth in GDP per capita is consistent with those predicted in earlier macro-economic forecasts by the Treasury (2002) and the Productivity Commission (2005).

  • Document ID: 68019 |
  • Last modified: 5 February 2008, 9:02am