OECD Note on Australia

June 17th, 2016

In the past 11 quarters, domestic demand has contributed less than 0.5 percentage points to GDP growth in Australia, a worrying statistic with little historical precedent. This streak has only been equalled once before, and that was during the early 1990s recession. In fact, domestic demand has contributed less than 2 percentage points toward annual GDP growth during the last 14 quarters, much less than the historical average of 3.5 percentage points. This is increasingly being felt in people's wages, with private sector wage growth having dropped from 4.33 percent in 2008 to just 1.91 percent today.

According to the OECD, inequality is also a growing concern for Australia. This can easily be seen in the large gap that exists between property investors and would-be first-home buyers, along with problems in the education and superannuation systems. The OECD has made arguments for long-term education and superannuation reform, along with measures to strengthen consumer-protection regulation in banking.

From the OECD note on Australia:

Output growth will gradually strengthen towards 3% in 2017. Adjustment to declining resource-sector investment will continue. Growth in the non-resource sector will pick up, aided by dollar depreciation and a steady increase in household consumption. Further falls in the rate of unemployment are not expected to generate strong inflationary pressures and will help reduce inequality.

With receding risks from the housing boom, there is leeway for further monetary policy easing in the event of a new downturn. Close vigilance on housing-market developments is still required. Fiscal consolidation should be back-loaded in light of economic uncertainties. Tax reform should be a core element of structural policy.

Boosting productivity in Australia requires a focus on innovation. Targeted R&D policy, university-business linkages and effectiveness and efficiency of financial support for research are important. Ensuring strong competition, regulation that accommodates new internet-platform-based businesses, sound ICT infrastructure and continuing education reform are also key for productivity performance. In addition, education reform will boost inclusiveness through stronger low-end skills and better ICT infrastructure can reduce gaps in economic opportunity by improving access in rural areas.