OECD Economic Outlook, Volume 2019 Issue 2

Australia

Economic growth is projected to firm to about 2¼ per cent in 2020-21. While weaker trading partner growth and a downturn in domestic dwelling investment will weigh on economic conditions, recent household tax cuts and monetary policy easing should provide some support to activity. Subdued output growth and lingering uncertainty will weaken the recent strong labour market conditions.

Monetary policy is accommodative and the central bank is projected to make a further cut in the policy rate in its attempt to achieve the inflation target. Macroprudential policies may need to be tightened if lower interest rates fuel house prices, which would create imbalances and expose the economy to downside vulnerabilities. Fiscal policy, which on current plans is expected to exert a broadly neutral influence, may need to play a more active role in strengthening economic growth.

Economic activity has been weak

Economic growth has moderated. Housing investment activity has slowed in response to past declines in property prices, with a continued slump in dwelling approvals indicating further weakness ahead. Private business investment in the non-mining sector has also eased, with the slowdown in the global economy and domestic drought conditions reducing exports and business confidence. Employment growth has been surprisingly robust given the modest pace of output growth, and is encouraging higher labour force participation. Despite this, private consumption spending has been sluggish, weighed down by slow wage growth and an increase in taxes paid by households.

Housing market and labour market: Australia

Source: OECD Economic Outlook 106 database; and Australian Bureau of Statistics.

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Australia: Demand, output and prices

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Fiscal policy could be loosened

The stance of monetary policy has become even more expansionary, with cuts to the key policy rate totalling 75 basis points since May 2019. Both business and household credit growth remain modest. However, house prices in some major markets have begun to rise again. High household indebtedness means that the authorities should stand ready to tighten macroprudential policy settings if lower interest rates fuel house price inflation through a sharp pick-up in credit.

Fiscal policy is expected to provide little support to economic growth, in accordance with the federal government’s commitment to future budget surpluses. The rollout of government services under the National Disability Insurance Scheme and recent tax cuts for low and middle-income earners should provide some support to household spending and reduce income inequality over the projection period. Nevertheless, a more expansionary fiscal stance may be warranted given that the economy is growing well below its potential and the relatively low public debt burden. The government should consider further public investment in green infrastructure and bringing forward shovel-ready capital projects from the government’s Infrastructure Investment Programme. At the same time, growth-enhancing tax reforms should be prioritised. These include shifting the tax mix away from direct taxes and inefficient taxes like real-estate stamp duty to the goods and services tax (GST) and land taxation.

Economic growth is projected to be stable

The economy will grow at a stable rate. Export growth will decline in line with the slowdown in major trading partner economies. This will continue to have an impact on business investment, though mining investment has now troughed and will gradually rise over the projection period. Given the outlook for GDP growth, the unemployment rate is unlikely to decline much further and inflation will remain below target. As a result, the central bank is projected to provide further monetary policy stimulus.

The risks to the economic outlook are tilted to the downside. As a small open economy, Australia is particularly exposed to the global growth slowdown. Investment activity has moderated in China, Australia’s main trading partner, and trade policy tensions are further threatening economic activity in the region. High indebtedness of the household sector could exacerbate the transmission of an economic shock. In contrast, an easing in global trade policy tensions could improve consumer and business confidence, with positive effects on spending activity.