Service sector investment: we’re going to have to be picky

“If we’re going to bat above our weight, we’re going to have to certainly be very picky about what we’re good at in this very competitive age,” IBISWorld Founder and Director, Phil Ruthven AM has told a CEDA audience in Queensland.

Speaking at the release event for CEDA’s latest research report, Improving service sector productivity: the economic imperative, Mr Ruthven set the scene for the current state of affairs of the Australian economy.

He explained how Australia had passed through the industrial revolution, which was dominated by manufacturing, a sector comprising 30 per cent of Australia’s GDP in 1961, which now comprises a mere 5.8 per cent of Australia’s GDP.

He said that while Australia’s natural resources may have been a boon to our economy for many years, currently agriculture and mining combined contribute less than 10 per cent of national GDP.

“Over last five years – where did the new GDP come from, and what did we lose?” Mr Ruthven asked.

“Only one industry lost most of its GDP, and that’s manufacturing. The only thing that has happened to mining is that the prices have come down, but the volumes are still going up.”

He said that apart from mining and construction, the rest of the country is growing “on the back of services”.

“Employment is not too far different, if you want to look at the proportion of the 12 million employed Australians and ask where they are, you can again see in this case the primary sector is even smaller, it’s less than five per cent of all employment,” he said.

“Manufacturing is a little bigger in its contribution to the economy but again the story is the same – the service industries are dominating.”

He said that the digital era is a very important part of what is coming to the aid of the services.

“ICT has been a big boon to the services industries. Pick-up in the sector of digital services is happening as you are starting to feel the pick-up of digital technologies,” Mr Ruthven said.

“If almost all the jobs are now coming from the service sector, then we had better get competitive.”

He explained the world is slowly becoming an aggregation of regions, which he described as the EU, North America, South America, and the Asia Pacific nations. 

He said Asia would be of particular importance to us, and the Asia Pacific and Asia at large are “very much” where Australia’s future lies.

“Why do I bring up Asia?” Mr Ruthven asked. “Because their productivity rate is running just over four per cent per annum. Our productivity has run at 1.7 per cent per annum for the last 100 years. 

“It’s run slightly higher that in the last couple of years at 1.8. So, we’re doing better right now than we have in the entire history of Australia, but we are no longer dealing with America, or England, or Europe – we are now dealing with Asia.”

With two-thirds of Australia’s migrants coming from Asia, Mr Ruthven said Australia is on its way to becoming Eurasian.

“With the growth of the our Asian neighbours, we should be running at 3.5 per cent GDP, but we haven’t been there for the last 10 years. We can but hope this will change,” he said.

“Asia’s productivity is one of the great challenges we’ve got. It’s been running at four per cent per annum… which is over twice our rate. So, we do have an enormous challenge in front of us.”

He emphasised that part of this challenge would be focusing on the skills and strengths Australia already has, and investing and building on these.

Mr Ruthven agreed with CEDA’s recommendations, saying that Australia should:
  • Resist inevitable pressure to place barriers in the way of change;
  • Remove existing barriers assisted by the Productivity Commission;
  • Support greater transparency of health information; and
  • Increase productivity through business system innovation in health care.
Additionally, he said we should:
  • Ensure immigration and IR systems provide access to skilled foreign workers;
  • Provide high quality VET support for industries seeking to upgrading their skills; and
  • Undertake periodic independent reviews, as recommended by the Murray inquiry for the financial sector, to ensure appropriate government support is being delivered as intended.

Mr Ruthven’s address was followed by a panel discussion, moderated by Australian Services Roundtable Chief Executive Officer, Alina Bain and featuring panelists: Australian Unity Group Managing Director, Rohan Mead; Griffith University Business School Senior Lecturer, Dr Andreas Chai; and Mr Ruthven.

Mr Mead discussed why the issues discussed were not resonating with the Australian population, saying: “I think the backdrop we have to acknowledge is our communities are anxious”.

He said this was the reason citizens were not supportive of positive international trade agreements, and that the issue stemmed from the fact Australia is in the middle of a demographic change. He said this demographic change included the fact that, for the first time for the industrialised world, we are facing a much older population.

“We are the first human societies that have ever witnessed mass ageing. How do we re-think opportunities that will resonate with our communities?” he asked.

Dr Chai discussed the role tariffs will play, saying: “Tariffs on goods and services in Australia are almost nonexistent. The future is no longer in tariff reductions. It’s actually in financial integration; it’s in foreign direct investment.

“We should stop focusing so much on goods and services flow, and start looking at the financial flows as well as the migratory flows because they’re really important when we start thinking about things like combatting skill shortages.”