OECD Economic Outlook, Volume 2023 Issue 2

Australia

Real GDP growth is projected to slow from 1.9% in 2023 to 1.4% in 2024 before recovering to 2.1% in 2025. The accumulated impact of higher interest rates and cost of living pressures will damp spending by households and businesses over the coming year, though this will be partly offset by continued strong working-age population growth and the ongoing recovery in education and tourism exports. The unemployment rate is projected to rise moderately, reaching 4.4% by mid-2025. Inflation will moderate, aided by abating global inflationary pressures, though inflation of some services components is anticipated to remain elevated throughout 2024.

Fiscal reforms are needed to improve the sustainability of the public finances. Reducing private pension tax breaks and increasing receipts from the goods and services tax would raise revenue as fiscal costs related to the ageing population and climate transition increase. Measures that improve the efficiency of public spending, including encouraging more patient care in primary care settings and preventive health policies, are also a priority.

Consumption has slowed but labour market conditions remain firm

Economic growth has slowed, with weaker household consumption, high inflation and tightening financial conditions. Nonetheless, labour market conditions remain firm, with the employment to population ratio well above pre-pandemic levels. Public investment has accelerated and there are signs that dwelling approvals have stabilised in recent months after declining over the past year. Inflation, although still high, has peaked, with the CPI rising 5.4% over the year to the third quarter of 2023. The housing component has made a particularly strong contribution to year-ended inflation. One-year-ahead inflation expectations of consumers and union officials have eased, though they remain above the Reserve Bank of Australia’s 2‑3% target band.

Australia: Labour market and inflation indicators

1. The trimmed mean is the average rate of inflation after removing the items with the largest price changes (positive or negative). It is the weighted average of the middle 70% of items.

Source: OECD Labour Force Statistics; and Australian Bureau of Statistics.

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Australia: Demand, output and prices

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The slowdown in the Chinese economy has had limited impact so far on Australian exports. Despite weaker growth in the property sector, demand for Australian bulk commodity exports has been buoyed by ongoing infrastructure and manufacturing investment in China. Demand for Australian thermal coal has also been supported over the past year by the lifting of Chinese trade restrictions in the first quarter of 2023.

Monetary policy has tightened further and the fiscal deficit is narrowing in 2023

The Reserve Bank of Australia resumed tightening of monetary policy at the November meeting, raising the official cash rate by 25 basis points to 4.35% after holding the policy rate steady since June 2023. The projections assume that the cash rate will be held at this restrictive level until inflation is clearly declining to the target band, with 75 basis points of interest rate cuts assumed between the third quarter of 2024 and end-2025. The underlying budget deficit is projected to narrow in 2023, largely owing to a spike in tax receipts from businesses and households. Fiscal policy is assumed to have a slightly contractionary influence on economic growth in 2024 and 2025. The Commonwealth Government’s Energy Price Relief Plan, which set a cap on wholesale coal and gas prices and provided targeted energy bill relief, is expected to reduce headline inflation by ¾ of a percentage point by the second quarter of 2024.

Economic growth will continue to slow

Economic growth is projected to slow from 1.9% in 2023 to 1.4% in 2024, before recovering to 2.1% in 2025. Higher interest rates and cost of living pressures will damp spending by households with few accumulated savings and weigh on housing investment. Continued strong working-age population growth and higher exports as foreign student arrivals further recover will partly offset these headwinds. As GDP growth slows, the unemployment rate is projected to start rising, reaching 4.4% in 2025. Inflation will moderate, aided by abating global inflationary pressures particularly for goods, and is expected to fall to the top of the RBA target band by early 2025. More persistent inflationary pressures or a sharper slowdown in China than expected pose downside risks to GDP growth.

Fiscal reforms can help accommodate ageing costs

Further fiscal reforms are needed to improve the sustainability of the public finances given that costs related to population ageing and the climate transition will intensify. Annual fiscal costs from health and long-term care are estimated to increase by 0.8% of GDP between 2023 and 2040. Raising further revenue, such as through reducing private pension tax breaks and increasing receipts from the goods and services tax, should be considered. There are also potential savings on the spending side, including by encouraging more patient care in primary care settings and preventive health policies. Structural reforms that support medium-term economic growth are also needed. Immigration will continue to play a key role in the labour market, but the composition of the skilled migrant intake needs to be more responsive to changes in the skill needs of industry, including through better use of timely and granular data and the views of employers.