OECD Economic Outlook, Volume 2019 Issue 1

Australia

The economy is projected to continue to grow at a steady pace. New capacity in the resource sector will boost exports, although weaker growth in trading partners will slow export growth in 2019. Housing‑market cooling will damp construction activity. Business investment and government spending, on the other hand, will support growth. Wages and consumer prices will pick up only gradually.

Monetary policy is projected to remain unchanged until the end of 2020, reflecting moderate price pressures and weaker prospects for economic activity. Risks from the housing market and high household indebtedness warrant continued vigilance. The government budget will be in surplus in 2019, giving ample room to support activity and incomes of the most vulnerable in the event of a downturn.

Business investment and government spending are supporting growth

Non-mining business investment is picking up, and the decline in mining investment is set to bottom out. While favourable terms of trade and additional resource exports are supporting the economy, weak global trade has slowed total exports. Government spending, via the rollout of the services under the National Disability Insurance Scheme and public infrastructure works, is boosting aggregate demand. Housing prices have been falling steadily for more than a year, damping housing investment, construction activity and household consumption. Business and consumer confidence have weakened recently. Rising employment, on the other hand, is boosting incomes and consumption.

Housing prices and labour market: Australia

1. Quarterly volumes, expressed at 2016/2017 prices.

Source: OECD Economic Outlook 105 database; OECD Analytical House Price database; and Main Economic Indicators database.

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Australia: Demand, production and prices

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The unemployment rate is at a five-year low and labour force participation has risen substantially. However, under-employment remains elevated, suggesting remaining labour-market slack. Wage growth has picked up slightly in recent quarters, but remains at low levels historically.

Accommodative monetary policy remains appropriate and there is now fiscal space

Monetary policy remains supportive: the policy rate has been unchanged at 1.5% for more than two years. Inflation remains well below the target range and wages and prices are expected to rise only gradually. House prices are likely to continue a steady decline – albeit from very high levels – with negative effects on household consumption and economic activity. This projection envisages no change in the policy rate over the projection horizon, although market expectations are now tilted towards a cut this year and next. Household indebtedness remains high, although growth in housing credit has eased and credit conditions have tightened, partly driven also by past macroprudential measures. Given the potential financial and macroeconomic risks, supervisors should maintain vigilance.

The government debt-to-GDP ratio has risen in recent years, but remains relatively low in international comparison. Conditional on robust growth, the 2019 budget is committed to future budget surpluses with the aim of reducing public debt, and eliminating net debt by 2030. Budget plans envisage reductions in personal taxation over the short and medium-term and lower taxes on small businesses, financed with strong revenues from economic growth, as well as expenditure control and measures to combat tax avoidance and evasion. However, the priority on combatting socio-economic exclusion, for instance through education reform and improved support for job seekers, should be maintained.

Growth is projected to remain robust

Economic growth will continue at a steady pace, with a slight moderation in 2019 due to slowing global growth and the cooling housing market. Private consumption growth will slow, as households become less willing to draw down savings. Exports, business investment and public demand will support growth over the projection horizon. Inflation will pick up only gradually and the unemployment rate will level out. High indebtedness of households remains a risk. Unexpectedly large corrections in house prices could significantly reduce household wealth and consumption, and affect the construction sector. Global commodity markets remain an important source of income and growth, but also of uncertainty and risk, particularly through exposure to any slowdown and rebalancing in China.