OECD Economic Outlook, Volume 2024 Issue 1

Australia

Real GDP growth is projected to slow to 1.5% in 2024 before recovering to 2.2% in 2025. The impact of higher interest rates will continue to damp spending by households and businesses over the coming year. The unemployment rate is projected to rise further, reaching 4.3% in 2025. Price pressures will continue to ease, although inflation of some services components is anticipated to remain elevated throughout 2024. A downside risk to economic growth is that taming stubborn services inflation may require tighter monetary policy than currently assumed.

Monetary policy should remain restrictive in the short term to tame inflation and the fiscal deficit should be narrowed in the coming years. Productivity-enhancing policy measures would boost medium-term economic growth prospects. Policies that help promote competitive markets, such as aligning product standards with other advanced economies, should be complemented by those that improve labour mobility, including eliminating unnecessary occupational licenses or unnecessary non-compete agreements in employment contracts.

The economy is slowing but the labour market remains tight

Real GDP growth slowed to 0.2% in the fourth quarter of 2023. Consumption remained weak as spending on discretionary items fell by 0.9% in the quarter. Investment in private dwellings and machinery and equipment investment also declined. Tightness in the labour market has abated slightly, with the unemployment rate rising from its low of 3.5% in October 2022 to 3.8% in March 2024. Leading indicators, such as the index of forward orders from the National Australia Bank Business Survey, have eased. Nonetheless, spare capacity remains limited and growth in unit labour costs is still elevated compared with recent history. This is translating into relatively high inflation for labour-intensive items such as some market services. Past easing of global supply bottlenecks and fuel prices have caused inflation of tradable items to fall sharply.

Australia: Inflation and labour market indicators

1. The underemployment rate counts part-time workers who would prefer to work additional hours and people who usually work full time, but are currently working part-time hours.

Source: Reserve Bank of Australia (RBS); and Australian Bureau of Statistics (ABS).

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Australia: Demand, output and prices

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Demand for Australian bulk commodities continued to expand through the end of 2023, despite a slowdown in the Chinese real estate sector. The RBA Index of Commodity Prices showed a 6.1% increase in bulk commodity prices (in Australian dollar terms) between July 2023 and March 2024. International student arrivals are now back to pre-pandemic levels, with strong growth having boosted education exports. Imports fell heavily in the fourth quarter of 2023 with a decline in tourism spending abroad.

Monetary policy is restrictive but fiscal policy will support the economy in 2024

The Reserve Bank of Australia has kept the cash rate stable at 4.35% since November 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 the end of 2025. The underlying budget deficit is projected to increase in 2024, as cuts to statutory personal income tax rates and changes to tax brackets come into effect. These measures return the proceeds from bracket creep in previous years to households, arising from a progressive personal taxation system that does not have indexation of tax thresholds. Fiscal policy is assumed to have a slightly expansionary influence on economic activity in 2024 before there is a modest fiscal contraction in 2025. A tightening of visa requirements in 2024, including on international students, is anticipated to weigh on further increases in population growth and education exports.

Economic growth will increase in 2025

Real GDP growth is projected to slow to 1.5% in 2024 before recovering to 2.2% in 2025. The accumulated impact of higher interest rates and cost of living pressures will continue to damp spending by households and businesses over the coming year. The unemployment rate is projected to rise moderately, reaching 4.3% in 2025, helping to ease wage pressures. Price pressures will ease further, although some services components are expected to continue experiencing strong inflation throughout 2024. A downside risk to economic growth is that stubbornly high market services inflation requires tighter monetary policy than currently assumed. A sharper than expected slowdown in the Chinese economy would also weaken demand for Australian exports. An upside risk to both economic growth and inflation is stronger than anticipated consumption if households delay rebuilding savings as real disposable income recovers.

Productivity-enhancing reforms could support the recovery

Monetary policy should remain restrictive in the short-term to tame inflation and the fiscal deficit should be narrowed in the coming years. With fiscal pressures related to ageing and the climate transition ahead, reforms will be needed to promote medium-term fiscal sustainability. These include tangible measures to slow growth in National Disability Insurance Scheme costs, potentially through better clarity on the eligibility and scope of support packages, as well as improved scheme administration. Productivity-enhancing reforms can set the economy up for a period of sustained economic growth. For instance, greater flexibility in land zoning systems would improve the ability of new businesses to enter and grow in desirable locations and increase competition in the business sector. So too would efforts to further align product standards with other advanced economies. Reducing barriers to labour mobility would support efficient resource allocation, including the elimination of unnecessary occupational licenses or unnecessary non-compete agreements in employment contracts.