Australia

The Australian economy has been a strong performer among peers, with its GDP growing on average by +2.9% over 2000-2019 and +2.6% over 2010-2019. This compares with advanced economies in aggregate on average at +1.9% over 2000-2019 and +2.0% over 2010-2019 (and Asia-Pacific in aggregate on average at +4.5% over 2000-2019 and +5.0% over 2010-2019). Australia’s economy contracted by -2.1% in 2020 (after +1.8% in 2019) and recovered by a strong +4.9% in 2021. Though 2020 marked the country’s first full-year recession since 1991, it also proved shallower than previously expected and compared to other advanced economies. The recovery thereafter was supported by strong external demand and domestic policy easing. In 2022, growth is likely to decline to the still above-trend level of +3.9%, thanks the full post-Covid reopening of the economy, a tight labor market and elevated household savings. That said, rising inflationary pressures and interest rates along with slowing external demand mean that the economic momentum going into 2023 will be more difficult. Though risks are clearly on the downside, we think the Australian economy will be able to avoid a recession in 2023, growing by +2.1%.

When the Covid-19 crisis hit, Australian authorities responded quickly with strong and coordinated policy measures that supported employment, household incomes and businesses’ cash flow. The fiscal deficit went as high as 8.6% of GDP in 2020 and has been consolidating since (we expect 2.6% in 2022 and 2.5% in 2023) as emergency pandemic support has been removed and fiscal revenues are being shored up by higher commodities prices. On the monetary policy side, the Reserve Bank of Australia (RBA) has been hiking its policy rate in 2022 in order to contain elevated inflation rates, which have reached their highest levels in more than 20 years. The benchmark official cash rate has risen from 0.1% at the beginning of the year to 2.6% as of October 2022, and we forecast 100bps worth of further hikes in the coming quarters.

Australia’s business environment is well-positioned in our assessment of 185 economies, rated in the best range in all sub-components apart from one (which is at the second-best range). The Heritage Foundation’s ‘Index of Economic Freedom’ survey 2021 assigns Australia rank 3 out of 184 economies (up from 5th in 2016), reflecting particularly good scores with regards to judicial effectiveness, financial freedom, trade freedom, government integrity, fiscal health and business freedom. Comparatively speaking, the scores related to tax burden and government spending are a little lower. Meanwhile, the World Bank Institute’s annual ‘Worldwide Governance Indicators’ survey indicates a particular good global ranking for regulatory quality (and control of corruption at 14th position and rule of law at 17th). Our proprietary ‘Environmental Sustainability Index’ puts Japan at rank 53 out of 210 economies, reflecting strengths water stress and climate change vulnerability, but weaknesses in terms of and renewable electricity output and recycling rate.

After the general election in May 2022, the Labour party, led by prime minister Anthony Albanese, is likely to remain in power until the end of its terms in 2025. Both the previous Liberal-National coalition government and Labour actually saw voting shares decline compared to the 2019 election, beneficiating the Greens and the independents and reflecting the electorate’s concern with climate change and corruption. Labour and the Greens (along with some groups of independents) support more actions in these areas.