The economic reality check every business must take

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As the economy slows down, it’s time for business leaders to shake things up.

How can businesses grow when faced with the worst economic growth figures this century? This is a question that every Australian business leader should have an answer for, and yet many organisations seem reticent to acknowledge and respond to the slowdown.

Australia’s economic growth remains persistently lower than at any point in the past two decades. Average real gross domestic product (GDP) growth is down to 2.64% (see figure). Worse: it’s forecast to fall even further. Australia’s economic growth prediction is just 2.3% for 2020-2040.

Average real GDP growth
1984-1999 3.76%
2000-2008 3.14%
2010-2019 2.64%
2020-2040 2.32%

Source: IHS Markit & ABS

Over time, slower growth predictions can become self-fulfilling, feeding into expectations for inflation, real returns, and risk premia that drive decisions about savings, investment and capital allocation which reinforce these same trends. In fact, the current discussion about negative interest rates and quantitative easing (QE) may very well be just one manifestation of such a dynamic. 

Businesses are failing to address the question: where will growth come from in 2020? When it comes to slow, it seems we don’t want to know.


A perfect storm is brewing

Australians have become complacent about economic growth. Many have never seen a recession during their working lives. Some still cling to the fact that Australia has enjoyed 28 years without a prolonged downturn, and assume the good times will continue.

However, they do so at their peril.

With a perfect storm of sluggish wages stagnation, growth and stalling productivity, it’s time to reset expectations.


Why so slow?

The current decline in economic growth is driven by two broad forces. At a global level we see persistent evidence of ‘slowbalisation’ (as The Economist has put it) or global economic growth contraction, driven by a slowdown in overall global trade activity. 

Australia’s economic growth remains persistently lower than at any point in the past two decades.

Over the past 10 years, for instance, GDP growth has retreated from historical norms, while trade activity has slowed from around 61% of global GDP (2008) to approximately 58% currently. The amount of cross-border banking activity (cross-border bank loans) has shrunk dramatically from around 60% of GDP (2006) to approximately 36% today.

These global forces have exacerbated the principle driver of slower growth domestically. That is: productivity. 

Some of Australia’s productivity woes are structural, for example, our ageing population. Some are government-driven, such as greater government spending in lower productivity sectors like the National Disability Insurance Scheme as well as government investment in marginally productive infrastructure. And some are simply driven by a lack of workplace productivity.

All in all, the business sector isn’t motivated to do what’s best for the national economy; a case in point is within the energy sector.


Australia’s energy puzzle

Our economy has relied upon, and has been propped up by the mining boom. But change is happening in areas such as the energy ecosystem, which is in transition. Coal stations are closing, wind and solar farms are being built. To support the future direction of the economy, we need a consistent and strategic approach to Australia’s energy future so we can collectively maximise the opportunity this presents. 

There’s no doubt a critical piece of Australia’s energy puzzle will be determining the pathway we take to transition to a low carbon economy.  PwC’s recently released ‘The Low Carbon Economy Index 2019’ highlights the urgency of this issue: Australia has a decarbonisation rate of 1.8% and comes in at 13th place on the global Index, behind Germany (top performer with a rate of 6.5%), and behind regional powers China (3.9%) and Japan (3%). 

Of course, some of the domestic drivers of slower growth are beyond business’ control. Yet there is still plenty that businesses can do.


Innovation is not a dirty word

But productivity gains are there to be made for companies who have committed to research and development (R&D). But as a country, we underspend on this. The ‘Global innovation 1000’ study shows Australian companies only account for four of the world's 1000 largest corporate R&D spenders.

Australia spends 1.9% of GDP on R&D. PwC research shows that for Australia's total R&D spend to reach OECD top 10 levels, we would need to spend an additional $13.7bn on R&D. On a per person basis, this is an additional $575 per person on R&D. Companies that put innovation at the core of business planning benefit from productivity gains when they use that money and other resources, talent, process and effective decision-making to generate products and services that connect with customers.


A slow economy needs a fast response

Economic stagnation presents business leaders with a stark scenario. Slower growth means lower profits for businesses and their shareholders, and lower wages for their staff. Put all of that together, and our collective living standards will slide too. 

Firms need to take a cold, hard look at the way they operate now, and accept that long-established strategies may not work in the (slower) future.

Action is required to prepare for what the economy may have in store next year.

Business leaders should be asking five key questions:
  • Can we drive improved productivity through better use of robotics, digitisation, and artificial intelligence (AI)?, supported by improved employee training?
  • Can we let go of any practices (and even products) that are no longer sustainable in the current climate?
  • Can we look to faster-growing economies for growth opportunities, and how well equipped are we to invest in new markets?
  • Is innovation at the core of our business planning?
  • How should we respond as interest rates continue to be close to zero, or even negative?

 

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In 2020 we will deep dive into each of these issues. Only together can we solve these important problems and navigate the country through what is predicted to be a testing year for the economy. We call this, The Together Effect. Contact us to help become part of the solution.

Contact us

Jeremy Thorpe

Chief Economist & Partner, PwC Australia

Tel: +61 (2) 8266 4611

Kieran McCann

Head of Content and Thought Leadership, PwC Australia

Tel: +61 (2) 8266 0252

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