One of the limitations of macroeconomics is that we tend to assume that everything is the same across the whole economy – it’s a reflection of the ‘macro’ in the name. Better data availability has improved the situation and encouraged a more sectoral approach. But too often, people assume that company-level or industry-level shocks wash out in the overall outcome, even though the conditions for that to be true do not actually hold.

This issue is particularly salient because the shocks that have hit the Australian economy over the past quarter-century have, in essence, been sectoral shocks, including the dot-com boom, the GFC, the mining investment boom – and especially the pandemic. A key lesson from the mining investment boom and bust was that, when a sector that had previously dominated growth and squeezed out all the other sectors eventually turns around and retrenches, it is hard for the rest of the economy to bounce back quickly and fill the gap. This is why we are a little nervous about what happens when the incredible ramp-up in the care economy finally matures. This outsized growth will eventually end. Will the market sector bounce back quickly enough to fill the gap?

The expansion in the care economy has also led to some discussion about the implications for measured productivity growth. The broader point, though, is that productivity is actually kicked along by waves of new technologies. Those new technologies are typically tuned to different activities and industries. They do not touch the whole economy evenly. That is particularly relevant for the wave of AI and related technologies. These innovations boost productivity the most in activities that can be boiled down to information that can be transformed and regenerated. They will have less impact in the ‘meatspace’ world of industries such as construction. The challenge is that productivity in construction has seen a long-term trend decline, both in Australia and overseas. Other solutions will need to be found.

#luciellis

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