Australia needs a new growth engine as mining profits wane, Westpac says

As mining investment wanes and commodity export prices ease, Westpac economist Pat Bustamante has said that Australia’s economy must find a new growth driver to boost living standards over the next decade.

“Without change, Australians are in for a period of anaemic growth in living standards over the next decade. This will cost the average Australian $75k in income over the next decade,” Bustamante wrote.

“The good news is that it does not have to be this way. Faster productivity growth can be an offset. Opportunities are emerging and we need to be well equipped to exploit these.”

Research from the Productivity Commission has shown that productivity growth in Australia has remained stagnant over the past decade. Over 50 per cent of Australia’s growth in living standards over the past 40 years has been driven by productivity growth, Westpac said.

The other key drivers of Australian living standards – higher labour utilisation and elevated commodity prices – are set to wane in the coming decades.

Higher labour utilisation has risen over the past few decades, driven by increased female participation, longer life expectancies and later retirements, and the uptick in flexible work practices.

Elevated commodity prices have also contributed significantly to Australia’s prosperity, delivering an estimated windfall of $120.9 billion over the three years to 2024–25, Westpac said.

“In the two decades to 2020, the mining industry delivered almost 55% of the growth in our living standards … predominantly driven by higher export prices for our key commodities,” Bustamante said.

“In the late 2000s, as mining investment projects came online, increased output and productivity levels continued to deliver a dividend for Australians.”

However, Westpac warned that the Australian economy was likely to see a drag from easing commodity prices in the medium term, and that further gains in labour utilisation would be modest as the employment-to-population ratio already hovers around record levels.

“The dividend from higher commodity prices is likely to be a thing of the past as key commodity export prices ease,” Bustamante said.

This leaves productivity as Australia’s strongest remaining lever to boost living standards over the medium term.

While Australian policymakers puzzle over ways to boost productivity and thus living standards, Westpac noted that flatlining productivity has been a global issue.

Possible explanations range from a lack of major technological advancements following the ‘IT revolution,’ a fall in allocative efficiency, which is likely to worsen due to tariffs, weak business investment and falling risk appetites following the global financial crisis.

The potential solution to the global productivity slowdown could be in new technologies such as AI, machine learning and quantum computing.

The International Monetary Fund (IMF) recently estimated that widespread AI adoption could boost productivity growth by 0.9 to 1.5 percentage points per year.

“These new and emerging technologies will not only help established industries, but as history shows, will give rise to new industries, jobs and products,” Bustamante said.