Box D
Recent Developments in
Capacity Utilisation
Judgments about the extent of spare capacity in
the economy have an important bearing on the
outlook for inflation. In general, if an economy has
considerable underutilised capacity, inflationary
pressure will be lower than if it is operating at
a high level of capacity utilisation. The level of
capacity utilisation also affects firms’ investment and
employment decisions, as firms operating close to
full capacity are more likely to invest in additional
capital and employ more workers, particularly if
output prices and profitability are rising. While the
amount of spare capacity in an economy is not
directly observable, a number of business surveys
publish aggregated measures of firm-level capacity
utilisation, which are helpful for gauging the balance
of supply and demand in the Australian economy
(Graph D1).
Typically, these surveys ask businesses a question
like ‘at what level of output is your company
currently operating?’ The NAB survey also asks firms
about the extent to which their output is being
constrained by the availability of capital, labour and
intermediate inputs. The responses suggest that
the availability of labour is an important driver of
overall trends in capacity utilisation while, perhaps
surprisingly, premises and plant have tended to be
a significantly less important factor over the past
15 years (Graph D2).
For much of the past decade, capacity utilisation
– as measured by various business surveys – rose
steadily, reaching unusually high levels. For example,
in late 2007 the NAB measure was at its highest
level in the two-decade history of the survey, with
most industries experiencing high levels of capacity
utilisation (Graph D1). Firms responded to this
tight capacity by significantly increasing demand
for labour and investment spending. Alternative
measures of spare capacity in the economy, such as
Graph D2
Graph D1
Constraints on Output*
Survey Measures of Capacity Utilisation
%
NAB survey of the non-farm economy
Per cent
%
83
83
80
80
77
77
%
ACCI-Westpac survey of the manufacturing sector*
%
30
30
0
0
-30
%
Availability of suitable labour
60
60
Premises and
plant
40
40
20
20
Availability of materials
-30
-60
1989
1993
1997
2001
* Net balance; deviation from long-run average
Sources: ACCI-Westpac; NAB; RBA
38
%
R es erv e ba n k o f Aus t r a l i a
2005
-60
2009
0
1989
1993
1997
2001
2005
* Per cent of firms reporting a minor or significant constraint
Source: NAB
0
2009
measures of labour underutilisation, also suggested
a significant tightening in resource utilisation in the
period to early 2008 (Graph D3).1
As economic activity slowed over 2008, capacity
utilisation declined, with measures suggesting it fell
modestly below its long-run average to be roughly
in line with the levels recorded during the relatively
mild 2000–01 downturn. While a particularly sharp
fall was recorded for the manufacturing sector,
consistent with the weakness in global demand for
manufactured goods, utilisation in the construction
and services sectors remained at relatively
higher levels, reflecting the overall resilience of
domestic demand (Graph D4).
From around mid 2009, measures of capacity
utilisation began to recover, and are now back above
long-run average levels. Initially, this was driven by
a pick-up in the manufacturing and construction
sectors, though a number of services sectors have
also reported increased capacity utilisation in recent
months. This is consistent with survey measures
indicating that firms have stronger hiring and
investment intentions, and with the improvement
in business sentiment more generally. Overall,
these measures suggest that the economy starts
the cyclical upswing with considerably less spare
capacity than earlier thought likely. R
Graph D3
Measures of Labour Underutilisation
%
%
Hours underutilisation rate
11
11
9
9
7
7
Unemployment rate
5
5
3
1984
1989
1999
1994
2004
3
2009
Sources: ABS; RBA
Graph D4
Capacity Utilisation by Industry
Per cent
%
%
Manufacturing
82
82
78
78
74
74
%
%
Construction
85
85
80
80
75
75
%
%
Services
83
83
80
80
77
77
74
1989
1993
1997
2001
2005
74
2009
Sources: NAB; RBA
1 The labour underutilisation rate accounts for both unemployed
persons as well as those workers who would like to work
more hours. A more detailed discussion can be found in the
November 2004 Statement, ‘Box B: Indicators of Labour Market
Tightness’, pp 35–36.
S tate me n t o n Mo n e tary P o l icy | f e b r ua r y 2010
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