Australia
Real GDP is projected to grow by 1.8% in 2023 and 1.4% in 2024. Tightening financial conditions and a weaker outlook for real incomes will weigh on growth. Labour market pressures will ease, with the unemployment rate rising to 4.6% by the end of 2024. Inflation, which likely peaked in late 2022, is projected to continue declining in 2023 as supply chain and commodity related cost pressures wane. A downside risk is a stronger-than-projected cutback in household consumption amid falling house prices.
Further monetary policy tightening will be necessary to bring inflation down to the 2-3% target range. Fiscal policy is expected to remain broadly neutral over the projection period. Further fiscal reforms should be considered to improve the sustainability of public finances, including redesigning the National Disability Insurance Scheme and improving the governance of infrastructure project selection and implementation. Reforms that improve the integration of women in the labour market and reduce the gender wage gap are also a priority. In this context, changes to tax and transfer policy settings, measures that improve childcare availability and adjustments to the parental leave system should be considered.
Economic activity slowed further
Real GDP growth in Australia slowed further in the last quarter of 2022, as strong inflation and tightening financial conditions weighed on demand. Population growth has picked up, partly due to border reopening and the return of international students following the pandemic, sustaining economic growth and providing some relief to the tight labour market. Inflation, although still high, appears to have peaked, with yearly growth in the CPI slowing to 7% in Q1 2023, driven by slowing goods and tradables inflation, although services inflation remains elevated. Quarterly wage growth appears to be gradually easing despite ongoing tightness in the labour market, with the unemployment rate at 3.7% near historic lows. High-frequency indicators suggest that consumption has slowed amid tightening financial conditions, with mortgage rates on outstanding loans reaching 5.9% in March, up from a low of 2.9% in April 2022.
Australia
1. Civilian population aged 15 years and over.
2. Trimmed mean is the average rate of inflation after ‘trimming’ away the items with the largest price changes (positive or negative). It is the weighted average of the middle 70% of items.
Source: Australian Bureau of Statistics.
StatLink2 https://stat.link/7prgbz
Australia: Demand, output and prices
1. Contributions to changes in real GDP, actual amount in the first column.
2. Consumer price index excluding food and energy.
Source: OECD Economic Outlook 113 database.
After COVID-19 restrictions were lifted in China, the return of tourism and education-related travel to Australia has boosted services exports. The upturn in China has also raised the price of Australian bulk commodities, particularly iron ore. Nevertheless, overall commodity prices have continued to normalise in recent months, although they remain elevated.
Further tightening of monetary policy is likely required
The Reserve Bank of Australia has continued to tighten monetary policy in response to rising inflation, raising its cash rate from 0.1% to 3.85% in a year. Further monetary policy tightening is likely to be necessary to bring inflation back to the target range of 2-3%, with the projections assuming that the cash rate will peak at 4.1% in mid-2023 and remain there until well into 2024. The underlying budget deficit is projected to widen slightly over the projection period as rising cost pressures offset falling spending on fiscal support measures introduced during the pandemic and the cost-of-living crisis. The growth impulse from fiscal policy is therefore expected to be broadly neutral over the projection period.
Economic growth will slow further
Economic growth is projected to slow further, to 1.8% in 2023 and 1.4% in 2024. High interest rates and rising costs of living will dampen spending by households with fewer accumulated savings. Past falls in house prices will exert a further drag on consumption through their effect on household wealth, and together with tight financial conditions will weigh on housing investment. Continued strong population growth and higher exports as travel recovers will partly offset these headwinds. As GDP growth slows, the unemployment rate is projected to start rising, reaching 4.6% by late 2024. Inflation will moderate, aided by lessening global inflationary pressures particularly for goods, and is expected to fall to the top of the
target band by the end of 2024. There are both upside and downside risks to economic growth. A quicker than expected fall in inflation, which could arise if goods prices normalise to a greater extent than currently projected, could require less policy tightening by the Reserve Bank of Australia. However, further declines in house prices and persistent inflation could cause households to cut back on spending more than expected.
Making economic growth more equal and sustainable
Further fiscal reforms are needed to improve the sustainability of the public finances. Ageing-related spending pressures will intensify, leading to persistent fiscal deficits under current policy settings. Raising further revenue, such as through reducing private pension tax breaks and increasing receipts from the goods and services tax, should be considered. At the same time, spending pressures need to be kept in check by redesigning aspects of the National Disability Insurance Scheme and improving the governance of infrastructure project selection and implementation. Growth and living standards would also be supported by greater gender equity. Further progress needs to be made to better integrate women into the labour market and reduce the gender wage gap. The Australian government is currently developing a National Strategy to Achieve Gender Equality. Areas to consider will include the impact of tax and transfer policies on women’s work incentives, access to childcare and the extent to which the parental leave system encourages gender equity in childcaring responsibilities.