Early each year, just as Australians are returning from summer and school holidays, the ABS publishes its annual dump of productivity data. Blandly titled the Estimates of Industry Multifactor Productivity and released without fanfare on a quiet Friday at lunchtime, few – even amongst the economics profession – take much notice.
But we should. Because in this labyrinthine dataset lies the answers to why Australia’s productivity has been so poor since the pandemic. With the RBA recently issuing the worst set of economic forecasts it has ever published – and squarely identifying poor productivity as the culprit – getting to the bottom of this question is fundamental for understanding our future economic trajectory.
As we did last year, we have unpacked the annual ABS data, and unfortunately it does not make for encouraging reading. Labour productivity in the Australia economy fell by 0.6% in the 2024-25 financial year, while even in the market sector – traditionally the engine room of productivity growth – both labour and multifactor productivity fell. Productivity fell in eleven of our nineteen industries, with particularly large declines in mining, manufacturing, construction and retail.
Far from pointing to an incipient turnaround in our fortunes, this year’s data shows that productivity has taken another turn for the worse.
But admiring the problem does little to change it. What does the data tell us about why Australian productivity is stuck in the doldrums? And what might we do to turn the ship around?
Australia’s productivity reverses after the pandemic
Bottom line up front: Australia’s productivity performance was woeful last financial year. When we bring together all the key macroeconomic indicators for 2024-25 in one place they reveal across the board declines:
This data is especially worrying as productivity is normally supposed to go up not down. Prior to the pandemic, Australia’s labour productivity averaged 1.2% growth per year. Outside of major economic disturbances – such as the global financial crisis or COVID pandemic – it is extremely uncommon for any of these productivity indicators to decline annually, let alone all four of them in the same year.
It also means that Australia’s economy has now had zero overall productivity growth for the last six years.
Productivity performance was a rollercoaster during the pandemic, initially surging in 2020 as many lower productivity industries were shuttered, and then falling again in 2022 as those industries reopened. But rather than returning to its normal growth path after the pandemic, it has since continued to decline and currently languishes at around the same level of 2018-19.
If we had delivered our average pre-pandemic performance, Australia’s productivity would be about 7% higher than it is today.
But what’s going on under the hood? A deeper look into the data on industry-level performance helps explain the causes.
Industry productivity paths – the good, bad and ugly
The key to understanding Australia’s productivity crisis lies in differences between different industry paths. Productivity is very industry-specific: what is happening in construction, for example, looks very different to the issues affecting the care sector. Australia’s overall productivity is largely the sum of these different industry-level stories.
When we analyse the industry-level data, we can identify three groups of productivity performance:
Insofar as Australia has a productivity problem, it is because we have too many industries in the declining group and not enough in high growth. The high performers have delivered solid uplifts, but it has not been enough to counteract the falls seen across the industrial and care sectors.
Of particular concern is that the industries in the low-performing group are some of the most important for Australia’s future. The decline in construction augurs poorly for federal and state efforts to raise our low home building rates and improve housing affordability. A marked fall in utilities productivity says the same about industry readiness for the energy transition. Manufacturing sorely needs an uplift to deliver on the federal government’s Future Made in Australia agenda.
Mounting productivity burdens from the non-market sector
The problem of low productivity clusters is brought into sharper relief if we also consider the performance of the so-called ‘non-market sector’.
The non-market sector comprises three industries – public administration, education, healthcare & social – which are closely government-linked and predominantly government funded. They are a sizeable chunk of our productivity base, accounting for 25% of value-added in the Australian economy.
The non-market sector is also ground zero for Australia’s productivity crisis. As the chart below shows, the trend for productivity growth is a lot lower than for other industries – historically only 0.5% p.a., compared to 1.7% p.a. for the market sector.
This is often attributed to the difficulties in making productivity improvements in the non-market sector as it is primarily composed of highly-regulated and labour-intensive care activities. These activities are intrinsically harder to automate than other industrial and commercial processes; while the scope for innovation is constrained by tighter quality and safety regulations. Our expectations for productivity improvements should therefore be lower than for the rest of the economy.
But there is a difference between “lower” and “backwards”. And since the pandemic productivity in the non-market sector has been crashing. It has fallen by 6.0% over the just last three years – a rate of decline not seen before – and now sits at the same level it was fifteen years ago in 2010. The non-market sector has become an albatross around the neck of national productivity.
The problem has been magnified by rapid growth in the non-market sector. Since 2019, it has grown 22.0% in real terms – nearly double the growth rate (10.1%) seen in the market sector. Higher growth in the non-market sector has shifted the composition of the economy toward industries in which productivity is declining, further counteracting the uplifts delivered by the strong performing industries.
Low investment rates drag on productivity performance
A common thread through these industry stories is investment levels. Investment is a critical precondition for raising productivity – it introduces new equipment and technology, and catalyses new business processes, needed to utilise labour and inputs in the production process more efficiently. Without investment productivity gains will prove elusive.
It is therefore unsurprising that investment levels have been poor during our recent productivity crisis. The chart below shows the non-mining private sector investment rate in Australia – the percentage of output which is reinvested in new capital expenditure.
The data Australian investment rates crashed during the pandemic – from the mid 8s to the low 7s – and have only just managed to recover to their pre-pandemic levels in the latter part of 2025. Investment is what an economists label a ‘leading indicator’ of productivity, as investment today generates productivity dividends in the future.
Our current productivity crisis reflects this post-pandemic investment decline; years of under-investment has stifled the equipment and process upgrades needed to deliver productivity increases.
The near-term productivity outlook therefore hangs on the extent to which the uptick in investment seen in the latter half of 2025 proves and durable and broad-based. Much of this uptick was driven by datacentre build outs, which are a potential productivity booster but will take time to pay dividends. And likely won’t help the productivity problems in industries like manufacturing, construction or healthcare which need to lift their own investment rates.
Tackle the root cause to fix our productivity problem
The key implication is that Australia needs to focus on solutions to the root of the productivity problem – and that is a fairly concentrated group of industries. Most of the economy is eking out gains, and some industries are powering ahead. But very poor results from a cluster of industrial and non-market sectors are dragging national performance down.
This finding is very important, because it points the way to the reforms which would most immediately pay dividends. Targeted efforts that aim to turn around declining productivity in the handful of low performing sectors would make an outsized impact on overall national performance.
For the struggling industrial sectors – utilities, manufacturing and construction – regulatory reform is an obvious answer. These are some of the most-regulated industries in Australia, with complex and overlapping permitting systems covering many aspects of their operations. They are also the industries where the productivity burden of regulation is likely to be the greatest. A focussed process of regulatory streamlining that includes productivity as an objective, could capture the low-hanging fruit in these industries.
For the non-market sectors – particularly healthcare and social – governments have a powerful reform lever in the form of funding. In the absence of market mechanisms to drive productivity gains, such incentives need to instead come from funding arrangements. Both the federal and state governments have a role to play in mainstreaming productivity as an objective in the industries they shape.
These are not one size-fits-all fixes, but a range of industry-specific policy reforms that can tackle the productivity barriers afflicting our low performance industries. We explore some of these ideas – including tax simplification, regulatory streamlining, care economy funding arrangements – in the Australian Industry Group submission to the 2026-27 budget here.
Jeffrey Wilson is Head of Research and Economics at the Australian Industry Group.
He leads our economics team and provides strategic direction in developing the research program to support our advocacy, service delivery and policy activities.
Dr Wilson specialises in international economic policy, with a focus on how trade and investment shape the Australian business environment.
