After three decades of uninterrupted economic expansion, Australia’s economic performance is no longer the global benchmark it once was.
Once celebrated for its resilience, particularly during the 2008 global financial crisis, the nation is now grappling with sluggish growth, falling productivity, and stagnating living standards.
These structural challenges raise questions about the sustainability of its economic model in a rapidly evolving global landscape.
Australia’s growth slows
Australia’s gross domestic product (GDP) expanded by just 0.8% year-on-year during the first three quarters of 2024, trailing behind the United States (3.1%) and the Eurozone (0.9%).
This weak performance, coupled with seven consecutive quarters of negative per capita growth, suggests that the country would have been in a technical recession if not for immigration-driven population growth.
Inflation, which peaked at 7.8% in December 2022, remains a pressing concern. While other developed nations have managed to align wage growth with inflation, Australia’s real wages were still 4.8% below pre-pandemic levels as of late 2023.
Household debt has surged, and mortgage payments have skyrocketed due to interest rate hikes by the Reserve Bank of Australia (RBA), leaving many households struggling to make ends meet.
Structural weaknesses in the Australian economy
A major factor behind Australia’s slowdown is its over-reliance on commodity exports, particularly iron ore and coal, to fuel economic growth.
As global demand for these resources wanes, especially with China diversifying its supply chains and prioritising its own green energy transition, Australia’s export revenues have taken a hit.
This vulnerability underscores the need for diversification in export markets and sectors.
Another pressing issue is productivity. According to recent data, Australia’s labour productivity growth has been among the weakest in the Organisation for Economic Co-operation and Development (OECD).
This stagnation, coupled with outdated infrastructure and housing shortages, has strained the economy further.
A report by the National Housing Finance and Investment Corporation (NHFIC) estimates a shortfall of 106,300 dwellings by 2027, exacerbating affordability issues and dampening consumer spending.
Policy failures and missed opportunities
Australia’s policy approach during and after the COVID-19 pandemic has also come under scrutiny.
While many countries used the crisis as an opportunity to invest in green energy, innovation, and infrastructure, Australia’s fiscal measures were largely focused on short-term relief without a clear long-term vision.
For instance, investments in renewable energy and emerging technologies remain comparatively low, leaving the country ill-prepared for the global shift towards sustainable growth.
The RBA’s aggressive monetary tightening to combat inflation has also been a double-edged sword.
While necessary to stabilise prices, the rapid rise in interest rates to 4.35% has stifled consumer spending, which accounts for more than half of Australia’s GDP.
Treasurer Jim Chalmers has acknowledged these challenges but has yet to unveil comprehensive reforms to address them.
Migration policy has also been a contentious issue. While net migration hit a record 547,200 in 2023, policymakers have faced criticism for not adequately preparing for the strain this influx has placed on housing and infrastructure.
Although the government has announced plans to reduce migration levels, experts argue that a better approach would involve leveraging migration to boost productivity and innovation while addressing housing shortages.
Can the Australian economy rebound?
Economists agree that structural reforms are essential to reinvigorate Australia’s economy.
Priorities include boosting productivity through investments in technology, education, and infrastructure; diversifying exports beyond commodities; and fostering innovation in high-growth sectors like renewable energy and advanced manufacturing.
Tax reform is another critical area. Australia’s tax system remains heavily reliant on income and corporate taxes, with minimal contribution from consumption taxes.
Shifting towards a more balanced tax structure could help fund necessary investments without overburdening households and businesses.
Finally, fostering greater resilience in the economy requires reducing reliance on key trade partners like China and developing stronger ties with emerging markets.
This diversification is not only essential for economic stability but also aligns with global trends towards de-risking supply chains.
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