Date posted: 05/05/2022 8 min read

What’s driving GDP growth, really?

When it comes to GDP growth, spending on new and better tech has a big payoff, but it’s not the only thing lifting productivity.

In Brief

  • OECD analysis shows that increased capital investment drove 40% of GDP growth from 1987–2019.
  • Banks predict that in 2023 capital investment will increase by more than 9% in Australia and 8% in NZ.
  • More people working longer hours accounts for about a third of our increased standard of living.

One minute, we’re supposed to believe that tech will utterly transform our lives. Before you know it, we’ll be running our social and business lives in the virtual online reality. Next minute, Facebook, the chief propagandist for this ‘metaverse’, reveals that its subscriber numbers have stalled, its share price slumps, and the virtual-reality vision sounds more like the steamy fantasy of a gaming nerd.

One minute, the CBD office is kaput, we’ll all be working remotely and the dead weight of the corporate headquarters will be off our backs. Zoom’s share price – about US$70 pre COVID – skyrockets to US$559 by October 2020. And then, poof – the bubble bursts, and the share price drops by more than 75% to US$138 (at the time of writing). Are the financial markets telling us that flexibility was a pipedream and that, post-COVID, we’ll all be resuming our long commutes back to the grind?

Some of this volatility is the unravelling of the hyped-up share exuberance that emerged in the world of zero interest rates (central banks are in the process of taking away that punch bowl). But the rest of it reflects a deep uncertainty about how big the impact of new tech will be. Will it make us all considerably better off, enabling us to do things we couldn’t manage before? Or will it be the same old high-overhead world?

Faced with a question like that, what do we numerate types do? We look to data for answers.

Is tech increasing productivity?

We can make an educated stab at the impact of tech on our productivity thanks to the heroic data wranglers at the OECD (Go to and look under “Productivity”). Heroic, because they’ve tackled an exceptionally gnarly question: how much of any year’s GDP growth in any given country is down to people working more hours, how much is down to investment in both techy and non-techy stuff, and how much is down to everything else?

The table (below) shows the results averaged out over 1987–2019 (that’s as far back as the OECD data goes) for Australia, New Zealand and the US.

Contribution (%) to GDP growth, 1987–2019Click image to enlarge.

“ICT capital” means computer hardware, telecoms equipment and computer software and databases. “Non-ICT capital” is transport equipment and other machinery, non-residential construction, and R&D and other intellectual property products. That awkward “multi-factor productivity” (MFP) mouthful is what’s left of GDP growth when you’ve accounted for the impact of more bums on seats and more capital investment.

As the OECD says: “Traditionally, MFP growth is seen as capturing technological progress but, in practice, this interpretation needs some caution.” That’s partly because the categories are somewhat permeable.

Technological discoveries get embodied in new gear, and the impact of my new Dell XPS laptop is being counted in the ICT box instead of the MFP box.

New skills that employees have developed are in the bums-on-seats box, whereas again they would be better counted as MFP. The MFP box is also full of a bunch of other influences on growth, including the strength of competition, differences in companies’ management competency and the flexibility of an economy’s institutions.

The foundation of longer-term prosperity

For all its imprecision, the exercise gives us a rough and ready feel for what’s been happening and, with one exception around American MFP, it shows a consistent picture across all three countries.

Hiring more folk and working them harder isn’t unimportant – it accounts for about a third of our increased standard of living – but between them investment and improved technology are more important.

Higher capital investment has been responsible for some 40% of everything, roughly split equally between traditional spending on buildings and gear and new spending on tech stuff. The grabbag MFP box, which has a chunk of new tech in it, contributes about 20% towards higher living standards in Australia and New Zealand, but a notably larger 33% in the US.

At a first pass, roughly a fifth of our longer-term prosperity has come from increased investment in ICT capital. It’s not a game-changer so far, and a reality check on the frothiest of the sharemarket hype, but worth banking.

My guess, though, is that 20% is a lower estimate.

For one thing, in the early years of this exercise, IT was just getting underway. Back in 1987, we were at the stage where we’d just seen the launch of the Windows version of Excel. We hadn’t even begun to realise the potential of larger developments such as the internet or the remarkably rapid development of anti-COVID vaccines.

For another, I look at that large 33% MFP contribution in the US and suspect it’s partly because the US is home to the big tech titans. There’s a lot of tech impact camouflaged as MFP.

The promise of tech-driven growth

I’m not – yet – in the happy-clappy camp of “tech changes everything”, but I am decidedly down the productivity-optimistic end. I expect we’ll see real benefits in the next few years. For a variety of reasons – extreme skill shortages, changes in work patterns and employee expectations, new tech possibilities, the need to green existing processes – we’re looking at a likely surge in capital investment. National Australia Bank thinks it could boom by more than 9% in Australia in 2023 and Westpac expects about 8% in New Zealand.

“I’m not yet in the happy-clappy camp of ‘tech changes everything’, but I am decidedly down the productivity-optimistic end.”

At an economy wide level, our productivity outcomes could turn out pretty good. And at a business level, if my planned capital spending isn’t rattling along like everyone else’s, I’d be wondering why.

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