Productivity and the Machinery and Equipment Capital Stock

Business investment and Australian industry productivity 

 

 

 

 

There are many issues that affect productivity. Some are long-term, such as innovation, R&D, and education and training systems. Others are structural, like the number of micro and small firms, or institutional, like state based occupational licensing and building codes. However, for Australian industry by far the most important factor in its low level of productivity growth is the lack of business investment in the capital stock (which is the accumulated amount of machinery, equipment, buildings, structures, software and R&D).

 

Economic growth comes from increasing productivity, which is determined by the amount and quality of capital per worker and the rate of adoption of new technology. With investment the capital stock is upgraded and grows [1], so a low level of investment means slower growth in output, increasing economic inefficiency, less economic dynamism, and lower productivity. Industry investment in physical and intellectual assets is central to building capacity and upgrading technology.

 

The most widely used labour productivity measure is gross domestic product per hour worked. Labour productivity is also available as gross value added per hour worked for 16 industries in the market sector, which excludes three industries that lack meaningful prices and volume measures of output: Public Administration and Safety; Education and Training; and Health Care and Social Assistance.  It can also be estimated as industry value added (IVA) per person employed. 

 

In Australia there is a wide difference between a few high productivity growth market sector industries and two groups of low to medium and very low or negative productivity growth industries. On the hours worked measure for labour productivity, since 1995-96 there were three very high growth industries (over 100%), seven with medium growth (50-99%), and four industries with very low growth (under 50%), and two with negative growth. 

 

Table 1. Labour productivity hours worked basis, percent change

 

How does the M&E capital stock and capex data line up with the productivity stats from the ABS? This post looks at the 2023-24 data from the Australian Bureau of Statistics for productivity, capital stock, and gross fixed capital formation (GFCF, i.e. capital expenditure or capex) on machinery and equipment (M&E). Total GFCF was $649 billion, with $245 billion in Non-dwelling construction the largest component, followed by $142 billion on Dwellings. Expenditure on M&E was $129 billion, much more than the $41 billion spent on Software and $27 billion on R&D, the two other main components of investment by Australian industry.

 

Capital and Productivity

 

Figure 1 shows the M&E  net capital stock chain volume measure for All Industries, i.e. capital stock adjusted for depreciation due to use and for changes in prices for the 16 market sector industries, and the hours worked labour productivity measure. There is clearly a relationship between them, but there is a lag of a couple of years between changes in M&E capital stock and productivity. After 2005 the capital stock began rising but productivity followed three years later, and followed two years after the increase in capital stock flattened out from 2015.  After the COVID spike in 2021 productivity has returned to trend. 

 

Figure 1. Machinery and equipment capital stock and productivity

 

Source: ABS 5204

Note: All Industries net capital stock chain volume measure, and hours worked labour productivity. 

 

Machinery and Equipment Capital Stock

 

Since the financial crisis in 2008 machinery and equipment capital expenditure (M&E capex) has been falling, from eight to around four percent of GDP. With less investment the capital stock grows more slowly, leading to less or older capital per worker, slower growth in output, and therefore lower productivity. With a low rate of growth firms will not invest, or invest less, in expanding capacity and innovation. The result is less economic dynamism and increasing economic inefficiency, leading to lower growth in productivity and GDP. Very broadly, the net capital stock of M&E in each industry is around eight times their annual capex.

 

The top five industries in Figure 2 account for 53% of total M&E net capital stock, showing how  concentrated the M&E capital stock is in Australia. The industries are Mining, Transport, postal and warehousing, Manufacturing, Agriculture and Construction. 

 

Figure 2. Machinery and equipment capital stock by industry

 

Source: ABS 5204

 

 

Machinery and Equipment Capital Expenditure

 

M&E capex is also concentrated in five industries that accounted for 52% of the total in 2024. The two industries of Mining and Transport spent over $17 billion each, Manufacturing $12 billion, Construction $11.6 billion, and Agriculture $9 billion. The next five industries include four that spent between $6 and $7 billion, and one that spent $5.2  billion. 

 

Figure 3. Machinery and equipment capital expenditure by industry

 

Source: ABS 5204. Ranked by M&E capital stock. 

 

 

Productivity Growth 

 

Over the last five years there have been significant differences between industries in productivity growth. Table 2 has the 16 industries in the market sector, and shows between 2019 and 2024 three industries had high growth in output per hour worked of over 10%, but overall performance has been affected by five industries with negative growth, low growth in another seven industries, and no growth in construction. For most industries, MFP growth was worse than for labour productivity as hours worked. The highest performing industries were Agriculture, Forestry and Fishing and Information, Media and Telecommunications, the worst performing industries were Mining and Electricity, Gas, Water and Waste. 

 

Table 2. Market sector productivity growth 

 

The problem is that Mining, Manufacturing, Construction and Transport are industries that have the largest M&E capital stock and capex, but  low or no productivity growth. This implies there are inefficiencies in those industries that have constrained productivity growth, which may be due to industrial relations and conditions but also could reflect poor management, supply chain and logistics issues, or a low rate of adoption of new technology. Agriculture is the exception, with both a large capital stock and high productivity growth. 

 

Another issue is that Capital productivity has been falling since 1995-96. The decline in capital productivity is one reason Australia’s productivity growth has been so low, because over the last decade the low level of business investment means the capital stock has not been getting replaced and updated.

 

Figure 4. Capital productivity and private gross fixed capital formation

 

Source: ABS 5206. Total private GFCF as percent of GDP in current dollars. 

 

Figure 4 shows Total private gross fixed capital formation (GFCF), which is private sector investment in the capital stock, and capital productivity. The increases in GFCF during the fiscal response to the 2008-09 global financial crisis and the expenditure on plant and equipment during the mining boom from 2012 are apparent. What is significant is that capital productivity and the share of GDP of private GFCF were flat after 2016, before an increase in GFCF in 2023 and 2024 lifted capital productivity. 

 

M&E Per Worker

 

Another factor is capital intensity and increasing or decreasing capital per worker. Increased capital per worker is capital deepening, which means that labour has more capital to work with to produce output. Changes in the amount of M&E per worker vary greatly across industries. Figure 5 shows the change in the volume of M&E capital stock per person employed between 2010 and 2024 and two measures of labour productivity. 

 

Figure 5. Change productivity and M&E capital stock per person employed

 

Source: ABS 5204

Note: Annual chain volume measure of net capital stock divided by the number of workers in June, hours worked Labour productivity, and Quality adjusted hours worked labour productivity. 

 

Figure 1 showed the relationship between M&E net capital stock and the hours worked labour productivity measure. Figure 5 disaggregates both the M&E capital stock and productivity to show the wide range of difference between industries. The overall measures balance out industries with decreased M&E capital per worker (known as capital shallowing), which includes Mining, Manufacturing and  Professional, scientific and technical services, with those that have increased capital per worker (capital deepening) such as Agriculture,Electricity, gas, water and waste services, Construction, Wholesale and Retail trade.

 

Similarly, industries with increased labour productivity like Agriculture, forestry and fishing,  Wholesale trade, Retail trade, and Information, media and telecommunications, balance out those with decreased labour productivity like Mining, Manufacturing, Electricity, gas, water and waste, and Construction, which is an outlier because Construction also had a large increase in M&E capital per worker but little increase in productivity. 

 

There is no clear pattern here. Agriculture, forestry and fishing, Wholesale trade, and Retail trade had increased productivity and capital deepening. However, Rental, hiring and real estate services, Professional, scientific and technical services, and Administrative and support services had capital shallowing but increased productivity. (This might be associated with the difficulty of measuring output accurately in service industries). 

 

Conclusion

 

In the short run the single most important factor in increasing the rate of Australia’s productivity growth would be to increase business investment. Because business investment in Australia is so concentrated, industry policies to improve productivity should be targeted at those industries with the largest capital stock and capex but low productivity growth.

 

The top five industries account for 53% of total machinery and equipment net capital stock, showing how  concentrated the M&E capital stock is. Those industries are Mining, Transport, postal and warehousing, Manufacturing, Agriculture and Construction. M&E capex is also concentrated in those five industries, which accounted for 52% of the total in 2024.

 

The problem is that although Mining, Manufacturing, Construction and Transport are the industries that have the largest M&E capital stock and capex, they have had  low or no productivity growth. That may be due to industrial relations and conditions, but also could reflect poor management, supply chain and logistics issues, or a low rate of adoption of new technology. Agriculture is the exception, with both a large capital stock and high productivity growth. 

 

Another factor is capital intensity and increasing or decreasing capital per worker. Changes in the amount of M&E per worker varied greatly across industries between 2010 and 2024, and when comparing those changes to labour productivity there is no clear pattern. A few industries had increased productivity and capital deepening. However, others  had capital shallowing but increased productivity. Construction had more M&E capital per worker but little increase in productivity.

 

Australian productivity will be improved by increased investment in the capital stock. That may not be the only factor, but in the short run it is the most  important one. Traditional policy instruments to increase investment in M&E are tax incentives like accelerated depreciation, and financial incentives like production subsidies, grants and loan guarantees. These are blunt instruments, but they can be targeted at high growth frontier firms with high productivity and the high growth industries that drive economic expansion, which could become part of the Future Made in Australia policy. 

 

Business investment in M&E can also be promoted by identifying and removing barriers to investment like slow approvals for construction of new factories, development of new industry technology strategies, revising public procurement methods, offering prizes for technological innovation, and incentives like advanced market commitments for new products like prefabricated buildings and services like digital twins. 

 

The contemporary approach to industrial policy is more about establishing collaboration between the public and private sectors, and developing an institutional framework within which collaboration can best work. This emphasises supply of economic inputs such as energy, transport and skilled workers, but also requires a focus on outcomes and outputs instead of processes and procedures. If the outcome is more M&E capital for workers, that will also lead to more output and higher productivity. 

 

                                                                *

[1] Capital stock in the current year is last year’s stock minus depreciation (from use) plus new investment. 

Investment in Physical and Intellectual Capital in 2023

 Australian capex in machinery and equipment, software and R&D 

 

 

The 2023 Australian System of National Accounts provided by the ABS includes data for industry investment in software, research and development (R&D), and machinery and equipment (M&E) [1]. Industry investment in physical and intellectual assets plays a vital role in economic growth through building capacity, upgrading technology, and increasing the productivity of workers.

 

This post compares the capital expenditure of 18 Australian industries in 2023 starting with M&E, then software followed by R&D, with industries ranked by expenditure. The ABS estimates of each industry’s net capital stock [2] are also included, with industries again ranked by expenditure. The third figure for each category compares each Industry’s share of total capital stock to the industry’s share of GDP. 

 

 

Machinery and Equipment 

 

With expenditure of $120 billion in 2023, M&E is by far the most important component of investment by Australian industry. In Figure 1 Australian industries are sorted by M&E capital expenditure in 2023, from lowest to highest. The two industries of Mining and Transport spent over $15 billion, Manufacturing spent over $10 billion, and Construction and Agriculture each spent around $9 billion. Those five industries accounted for 51 percent of total M&E capex, which however is more distributed than Software and R&D capex. The next five industries include three that spent between $6 and $7 billion, and two that spent between $5 and $6 billion. 

 

Figure 1. Industries ranked by machinery and equipment capital expenditure

 

Source: ABS 5204

 

Economic growth can come from either increased amounts of capital per worker or from technological progress and increased productivity. Since the financial crisis in 2006 the share of GDP of M&E capex has been falling, from eight to around four percent, and is now half the level it was before the financial crisis despite the decline in interest rates to 2021. With less investment the capital stock grows more slowly, leading to slower growth in output and therefore lower productivity. With a low rate of growth firms may not invest, or invest less, in expanding capacity and innovation (innovation was discussed in the previous post). The result is less economic dynamism and increasing economic inefficiency, leading to lower growth in productivity and GDP.

 

Very broadly, the net capital stock of M&E in each industry is around eight times their annual capex. Although a few industries like Electricity and Health move a couple of places, the ranking in Figure 2 generally follows that of annual expenditure. Agriculture and Construction swap places, but the top five industries are the same and they account for 45 percent of the total net capital stock. Those five asset heavy industries are by far the most capital intensive in Australia, particularly when compared with the bottom six service industries that only have between $10 and $25 billion in M&E capital stock. 

 

 

Figure 2. Net capital stock of machinery and equipment by industry

 

Source: ABS 5204

 

 

When the share of total capital stock for each industry is compared to its share pf GDP no real pattern emerges. Agriculture, Transport, postal and warehousing, and Rental, hiring and real estate services all have M&E capital stock shares that are much larger than GDP shares. Manufacturing and Electricity, gas, water and waste also have larger M&E shares. For Construction, Mining, Retail and Wholesale trades, and Accommodation and food services M&E shares are slightly higher than their GDP shares. On the other side are Health care and social assistance, Professional, scientific and technical services, Finance and insurance, and Education and training with M&E capital stock shares well below their GDP shares. 

 

Figure 3. Industry shares of M&E capital stock and GDP compared

 

Source: ABS 5204. GDP in current dollars at basic prices [3]. 

 

 

Intellectual Property: Software

 

Figure 4 shows industries ranked by capital expenditure on software, which is markedly different from the M&E rankings where Mining and Transport were the largest. Professional, scientific and technical services, which includes computer systems and IT services, with $5.7 billion had the biggest expenditure. Built environment related professional services like architecture, engineering, quantity surveyors and project management are also in this industry. [4].  

Finance and insurance with $3.7 billion and Information, media and telecommunications with $3 billion are the second and third largest. Three other industries spent over $2 billion, and those six industries accounted for 64 percent of the total. The top five industries accounted for 55 percent. Construction had the twelfth largest capex, and was sixth from the bottom in software capex. Total Software capex was $31 billion in 2023. 

 

Figure 4. Industries ranked by software capital expenditure 2023

 

Source: ABS 5204

 

The ranking of industries by software capital stock follows that for capex, with the exception of Manufacturing, which falls a couple of places to 12. Broadly, the value of software capital stock is a bit more than twice the value of 2023 capex, indicating a rapid depreciation rate for software of around three years. The top five industries in Figure 5 accounted for 57 percent of software capital stock. Construction remains at twelfth. 

 

Figure 5. Software net capital stock by industry 2023

 

Source: ABS 5204

 

The comparison of Software capital stock and GDP shares is dramatically different to the M&E shares. Here Professional, scientific and technical services, Finance and insurance, Information media and telecommunications, Transport, postal and warehousing, and Electricity, gas, water and waste have much larger capital stock shares than GDP shares. Agriculture, Construction, Mining, Manufacturing, Education and training, Accommodation and food services, and Health care and social assistance, have smaller shares. For Retail and Wholesale trades, Rental, hiring and real estate services, and Public administration and safety the shares are similar. 

 

Figure 6. Industry shares of software capital stock and GDP compared

 

Source: ABS 5204. GDP in current dollars at basic prices [3]. 

 

 

Intellectual Property: Research and Development

 

In Figure 7 industries are ranked by capital expenditure on R&D in 2023, from lowest to highest. Construction with $200 million is third from bottom and has the lowest R&D spend of any of the major goods producing industries like Agriculture, Mining and Manufacturing, which with $4.8 billion had the second largest investment in R&D. Professional, scientific and technical services, which includes the IT and computer services industries, had by far the largest R&D spend with $7.7 billion in 2023. There are five industries with capex above $1 billion, and those five accounted for 77 percent of all R&D expenditure.

 

Figure 7. Industries ranked by research and development capital expenditure

 

Source: ABS 5204

 

Capital expenditure on software is much more important than R&D for most Australian industries, the three exceptions where R&D was greater than software were Agriculture, Mining and Manufacturing. Some industries with low R&D capex are among the largest in software capex, such as Transport, postal and warehousing and Electricity, gas, water and waste. It is not uncommon for software capex to be many multiples of R&D, such four times more in Construction and five times more in Electricity.

 

The industry rankings change with the current value of R&D net capital stock, particularly for Agriculture and Mining where the value is relatively low. The leading seven industries are still leaders, Health is eight, Electricity is nineth and Construction is now at ten, ahead of Retail and Real estate services. The top five industries account for 76 percent of all R&D capital stock. 

 

 

Figure 8. Net capital stock of research and development by industry

 

Source: ABS 5204

 

The comparison of R&D capital stock and GDP shares highlights how concentrated R&D is in Australian industry. Only three industries have significantly larger capital stock shares: Professional, scientific and technical services, Finance and insurance, and Manufacturing. Three more have slightly larger shares, Information media and telecommunications, Education and training, and Public administration and safety. For all other industries their R&D capital stock share is less than their GDP share. In industries like Agriculture, Construction, Transport, and Retail the R&D shares are much smaller than GDP shares. 

 

Figure 9. Industry shares of R&D capital stock and GDP compared

 

Source: ABS 5204. GDP in current dollars at basic prices. 

 

 

Conclusion

 

Industry investment in physical and intellectual assets plays a vital role in building capacity and upgrading technology. Between the 18 industries the ABS provides data on the level of investment varied widely in 2023, with the share of capex of the top five industries increasing from 51 percent in M&E to 55 percent in Software to 77 percent in R&D. However, different industries are in the top five. 

 

In M&E capex in the top five industries Mining and Transport, postal and warehousing have much larger capex and capital stock than the next three industries of Manufacturing, Construction, and Agriculture. Policies to increase M&E investment could target those industries, although because M&E capex is more distributed than Software and R&D capex across the leading dozen industries a more general approach has traditionally been taken.

 

 In Software the largest expenditure was by Professional, scientific and technical services, Finance and insurance, Information, media and telecommunications, and Public administration and safety. R&D capex is highly concentrated in a few industries. Professional, scientific and technical services, Manufacturing, and Finance and insurance had the largest expenditure. For Software and R&D, capex policies that target the top three or four industries would be most effective. 

 

Economic growth can come from increased capital per worker or from technological progress and increased productivity. With investment the capital stock grows, and a low level of investment means slower growth in output, lower productivity, less economic dynamism and increasing economic inefficiency. 

 

The net capital stock of M&E in each industry is around eight times their annual capex, and ranking generally follows that of annual expenditure. The ranking of industries by software capital stock also follows that for capex, with the exception of Manufacturing, and the value of software capital stock is a bit more than twice the value of 2023 capex. industries with low R&D capex are among the largest in software capex, such as Transport, postal and warehousing and Electricity, gas, water and waste. It is not uncommon for software capex to be many multiples of R&D, such four times more in Construction and five times more in Electricity. Unlike M&E and software, the R&D capex industry rankings change for net capital stock, particularly for the low capital stock industries of Agriculture and Mining. 

 

For M&E net capital stock the top five asset heavy industries account for 45 percent of the total, and are very capital intensive compared with many service industries. The top five industries in software capital stock accounted for 57 percent.  The top five industries account for 76 percent of all R&D capital stock. The comparison of R&D capital stock shares and GDP shares highlights how concentrated R&D is in Australia, with only three industries having significantly larger capital stock shares.

 

The industry Professional, scientific and technical services includes computer systems design and has the highest expenditure on both software and R&D, has the largest capital stock, and a much larger share of total capital stock than GDP for them. For Australia this is the leading industry for intellectual property software and R&D investment and capital stock. Because this is the industry that includes scientific research and IT systems and services this is not surprising, but the wide gap between this industry and all the others suggests it has a specific and special role in the economy, and industry policy should reflect that.

 

 

 

 

[1] The data used here is from Tables 63 and 64 of ABS 5204, which comes out twice a year in February and October. All figures in this post are in current dollars, but the publication includes constant dollar estimates for expenditure since 1960. 

 

[2] Gross capital stock values each asset in use at the current price, Net capital stock is the written down value of gross capital stock. The difference between the net and gross value is accumulated depreciation.

 

[3] The basic price is the amount retained by the producer in respect of the good or service that is produced as output, minus any tax payable (including deductible value added taxes) plus any subsidy receivable. 

 

[4] Professional, scientific and technical services include scientific research, architecture, engineering, computer systems design and related services, law, accountancy, advertising, market research, management and other consultancy, veterinary science and professional photography.