OECD Economic Outlook, Volume 2018 Issue 1

Australia

The economy will continue growing at a robust pace, around 3%. Business investment will pick up, with exports boosted as new resource sector capacity comes on stream. Public infrastructure investment will also support growth. A stronger labour market and rising household incomes will sustain private consumption. Inflation and wages will pick up gradually.

Monetary policy is appropriately supportive, with the central bank projected to start gradually tightening towards the end of 2018, when the pick‑up in wages and prices gathers pace. Risks from the housing market and high household indebtedness warrant continued vigilance. The fiscal position is sound. In the event of a downturn, fiscal policy should be used to support activity and protect the incomes of the most vulnerable.

Domestic and external drivers underpin growth

Improved terms of trade, strong global economic growth and additional resource exports are supporting the economy. Resource sector investment is bottoming out, while other business investment is picking up. Government consumption and infrastructure investment also support the economy. Rising employment is boosting incomes and consumption. Employment has risen quickly, with many jobs filled by rising participation in the labour market, in particular among women and older workers. Rising participation has slowed further declines in unemployment and kept inflation pressures in check. Wage increases are picking up only gradually and inflation remains below the target range.

Policy support can be gradually withdrawn

Monetary policy remains supportive; the policy rate has been 1.5% since August 2016. Withdrawal of stimulus is projected to begin towards the end of 2018, as wage and price growth are expected to pick up further on account of a continued strengthening of activity and labour market performance. The resulting boost to household incomes should mitigate risks associated with Australia’s very high household indebtedness.

Australia

Source: OECD Economic Outlook 103 database; and OECD Labour Force Statistics database.

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Housing markets already show signs of easing. House price growth has slowed markedly and housing loan approvals have edged down, partly thanks to macro‑prudential measures. Regulators have taken steps to limit growth of investor lending and have discouraged loans with high loan‑to‑value ratios. Aggregate indicators of household financial stress are low, although some areas – mining regions in particular – remain a concern. Macro‑financial risks from leveraged households and the housing market remain elevated, and the central bank and supervisors should therefore maintain vigilance.

Australia. Demand, output and prices

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Public debt in relation to GDP has risen in recent years, but remains relatively low and is projected to start falling given the government’s proposed goal to reduce the annual deficit by around ½ percentage point of GDP per year over the four‑year budget horizon. In the federal budget proposals for 2018‑19, the government notably proposes various reductions in personal taxation over the short and medium term, with a strong economy, expenditure control and revenue integrity measures helping to deliver the commitment for deficit reduction. The pace of deficit reduction is ample given projected growth. In addition, measures to combat social exclusion, for instance strengthening access to education and improving activation policy, could generate continued broad benefits from growth and trade.

Growth will remain robust

Economic growth is projected to continue at a robust pace. Exports and investment will have a positive impact, while consumption growth will be more subdued. Inflation will pick up only gradually. Strong global commodity markets remain an important source of income gains and growth, but also of uncertainty and risk. The slowdown and rebalancing in China could be a larger drag on growth than expected. High indebtedness of households remains a risk. Unexpectedly large corrections in house prices would reduce household wealth, and could cut consumption and damage the construction sector. The combination of strong employment growth and rising labour market participation raises questions about how much slack there is left in the economy and creates uncertainty surrounding when economic growth will translate into stronger increases in wages and incomes.