Whatever happened to productivity?

RISING labour costs and the stronger Australian dollar, together with a long-term loss of focus on innovation and appropriate infrastructure spending, has hurt Australia's productivity, economists say.

During the 1980s and 1990s, the Australian economy experienced strong productivity growth through reforms such as the removal of tariff barriers and increased competition, but these efficiency gains have stalled in recent years.

A lack of infrastructure spending means our ports and the rail lines to them are clogged and we are not benefiting as greatly as we could from the global resources boom.

In addition, there is an argument that broadband speeds in Australia have been behind other parts of the world, eroding our ability to do business efficiently and develop and implement cutting-edge technologies.

''Increased productivity clearly led to a strong rise in living standards in Australia through the 1980s and 1990s,'' says AMP Capital Investors' Shane Oliver. ''But while 10 years ago we were growing mainly through working smarter, now productivity is slowing and it is being masked by the record terms of trade - we are simply getting paid more for the things we export.''

The problem with this, says Dr Oliver, is that the benefits of the resources boom are much more restrictive within the economy. ''Not all Australians are participating in it and most of the benefits go to shareholders and those working for the mining companies.''

The impact of productivity was evident in the last company profit-reporting season. While the consensus was that local company results were no worse than expected, they were no better either - and certainly not as good as in the US, which perversely is teetering on the brink of a second recession in three years.

Australian corporate earnings rose 11 per cent overall, with a 34 per cent gain in the resources sector masking a 4 per cent fall among the rest, excluding the banks, according to the calculations of AMP Capital Investors.

Yet US corporates achieved an average profit growth of 19 per cent, a marked contrast, particularly given that the US has a resources sector proportionally much smaller than Australia's.

Dr Oliver says the contrast was in part because US corporates responded to the global slowdown by cutting jobs, whereas Australian companies tried to keep people on, often in a part-time or reduced capacity.

''The US worker paid a high price for the profit growth rate of US companies,'' he says. ''That's also why wages growth in Australia is running at 4 per cent, against 2.5 per cent in the US.''

The Reserve Bank has been banging on about Australian productivity in recent months, after productivity went into reverse in the first quarter of this year, declining by 1.5 per cent for the March quarter, after historically growing at an average of about 2 per cent a year. We get the June quarter national accounts on Wednesday.

Commonwealth Bank senior economist John Peters says that when the central bank is stressing a point like this, it's generally worth listening.

Deutsche Bank head of equity strategy Tim Baker says the relative strength of the two currencies was also important in the contrasting profit performance.

''The Australian sharemarket has much more of an overseas focus than the economy as a whole,'' he says. ''The rising dollar has had a lot to do with it - it's wiped a lot of the resources company earnings and in healthcare and at companies such as Amcor and Brambles.''

According to AMP's Dr Oliver, companies on the Australian sharemarket generate 30 per cent of their earnings offshore, while US-listed shares generate 40 per cent outside the US - and the US overseas earnings will have been boosted by the weak greenback.

Mr Baker expects the profit outlook for big Australian companies to be pegged back further in coming months.