Australia

Australia has been a strong performer in the past decades, with its GDP expanding by +2.9% on average in the 2000s and +2.6% on average in the 2010s. A strong post-pandemic recovery and favorable terms of trade have positioned Australia more favorably in the cyclical aspect compared to most advanced economies. However, household consumption has been slowing down since 2022, with headwinds arising from higher interest rates and the ongoing cost-of-living pressures, especially on housing, continuing to impact demand. Additionally, a sharp slowdown in export growth indicates that the external sector will contribute neutrally in 2024. As more than 30% of Australian exports go to China, this phenomenon could become even stronger if trade tensions between China and the US escalate. Likewise, China’s growth is converging to a slower path than before, which will also affect Australian exports and growth. Growth slowed down from +3.7% in 2022 to +2.0% in 2023 and is now expected to decline to +1.4% in 2024. However, real incomes are expected to increase by the end of 2024, supporting household consumption and eventually helping GDP growth to pick up. This is why we expect Australia’s growth to reach +2.4% in 2025. Australia is on a narrow path to a soft landing. Over the coming years, a more sustainable balance between supply and demand across the economy, including in labor and product markets, is expected to support the return to low and stable inflation as growth in domestic activity returns to trend.

Although the fiscal deficit increased because of measures implemented during the Covid-19 crisis, increased tax revenues and the expiry of Covid-era support programs led to a steep consolidation of the fiscal balance in 2022. In 2023, high commodity prices and lower unemployment allowed the government to register a narrow deficit of -0.9% of GDP in 2023. Despite those two years of fiscal balance improvements, some sources of fiscal pressure, such as ageing, climate change and the country’s heavy reliance on tax revenues, leads us to expect an increase in the fiscal deficit to -1.4% in 2024 and -1.5% in 2025. This deficit could also respond to rising healthcare and welfare spending.

The RBA’s rapid monetary policy tightening, initiated in May 2022, managed to slow down inflation substantially. The RBA had hiked the policy rate by a cumulative 300bps from May 2022 to June 2023, but has opted against raising interest rates since. However, disinflation recently slowed down, raising concerns on its path to return to the 2-3% target range. With continued excessive demand, a still tight labor market and steady domestic cost pressures, we expect monetary policy to start easing only towards the end of 2024 to restrain continued inflationary pressure.

Australia’s business environment is well-positioned in our assessment of 185 economies. The World Bank’s annual Worldwide Governance Indicators surveys suggest that the regulatory and legal frameworks are business-friendly and the level of corruption is low. Likewise, the Heritage Foundation’s 2024 annual Index of Economic Freedom surveys have put Australia 13th out of 184 economies in recent years and 4th in the Asia-Pacific region, reflecting very strong scores with regards to property rights, judicial effectiveness, government integrity, business freedom, trade freedom, investment freedom and financial freedom. However, Australia scores less favourably regarding the tax burden, attributed to a 45% income tax rate and a 28.7% of GDP tax burden. In our proprietary Environment Sustainability Index 2024, Australia ranks 42nd out of 210 economies, up from 54th place in 2023. Underperformance is mainly visible in renewable electricity output, recycling rate and CO2 emissions per GDP.

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 term in 2025, partly thanks to its support from the Greens and the independents. Those parties had benefited from an increased number of votes during the 2022 elections, reflecting the electorate’s concern with climate change and corruption. Scandals and political divergences have weakened the former Liberal-National coalition since the elections, and the Liberals have now been pushed more to the right of the political spectrum as some independents that are more progressive on social issues attract centrist votes. Ahead of the 2025 elections, Labour will have to take into account the ongoing concerns regarding housing and economic growth.