Australia’s Falling Competition Cost $2,000 a Person, RBA Finds

New analysis from the Reserve Bank of Australia (RBA) indicates that a decline in business competition from the mid-2000s to the Covid-19 pandemic significantly hampered Australia's productivity and household incomes. The RBA found that had competition not fallen, productivity and output could have been 1% to 3% higher due to better resource allocation, translating to an economic cost of approximately A$3,000 ($2,000) per person at the upper end.

Analysis

A new research paper from the Reserve Bank of Australia has quantified a significant economic cost stemming from a decline in business competition between the mid-2000s and the Covid-19 pandemic. The analysis concludes that this trend suppressed national productivity and output by an estimated 1% to 3%, a shortfall attributed to the inefficient allocation of resources across the economy. This translates into a substantial cost to household incomes, estimated at the upper end to be approximately A$3,000 ($2,000) per person. The moderately negative sentiment of this finding highlights a critical structural headwind for Australia's long-term economic growth potential. The lack of competitive pressure may imply that incumbent firms in concentrated industries face less impetus to innovate or enhance efficiency, which has broad implications for the country's overall economic dynamism and long-term investment returns.

Key Decisions for Investors

• Investors should monitor for any policy or regulatory responses from the Australian government aimed at increasing competition, as these could introduce headwinds for dominant firms in concentrated sectors and create opportunities for smaller challengers.
• The RBA's findings suggest a structural drag on Australia's long-term GDP growth, which should be factored into macroeconomic models and may warrant a more selective approach to Australian equities.
• Portfolio managers should assess their exposure to highly concentrated Australian industries, as the firms within them may face future regulatory scrutiny or prove vulnerable if pro-competition reforms are enacted.