Assessing this year’s growth prospects for the Australian economy, as well as growth prospects globally, is essentially a matter of arithmetic.

The Three “Ps” Driving Economic Growth

As the Australian Treasury pithily put it, three “Ps” drive economic growth: population, the proportion of the working population, and each worker’s productivity. Those numbers determine GDP. The trends for each of those numbers determine the economic outlook, and those numbers now show a decidedly downward trend.

Global population growth is slowing, according to projections from the Organization for Economic Cooperation and Development and the International Monetary Fund. That’s being accompanied by population aging, which translates into a declining proportion of the working population. Over the next 20 years, that proportion will decline at a more rapid rate than it has over the past decade. At the same time, despite the rapid digitalization of parts of the economy, global labor productivity growth also is slowing.

Australia and COVID-19

Until COVID-19, assumptions were that Australia likely would be affected by these trends to a lesser degree than other countries because of its unusually liberal immigration program. But if that policy changes, there would be greater uncertainty surrounding Australia’s longer-term growth prospects. Shorter term, the growth outlook also looks cloudy.

While the Australian economy has weathered the COVID pandemic far better than other countries — due largely to the nation’s relative physical isolation, its strong fiscal support, and high vaccination rates — the surge in the Omicron variant has disrupted Australia’s recovery. Given what we know of the variant, however, that disruption should be short-lived.

The Road Ahead for the Australian Economy

By my reckoning, the effective unemployment rate was down to 5% in December and probably did not rise all that much in January. Business confidence remains fairly high, and I suspect it will remain high by historical standards. Consumer confidence also remains high, largely due to greater household wealth in the form of rising home prices and the higher level of bank deposits due to pandemic-driven government relief efforts. While some households have had to take on more debt to get onto the housing price wealth escalator, low interest rates have kept the share of disposable income going toward interest payments at the lowest level in at least 35 years.

Australia has seen some increase in upstream producer prices, as well as some price increases in imported goods due to global supply chain pressures, but there hasn’t been any significant escalation in wage inflation as many expect the government to soon allow more migrants. As a result, there hasn’t been the same acceleration in headline or core consumer price inflation as in the United States or the U.K.

Inflation and Interest Rates

In that regard, it’s also worth emphasizing that the Reserve Bank of Australia has a looser inflation target — 2% to 3% — than most other advanced-economy central banks. So, notwithstanding the speculation in financial markets that the Reserve Bank will be raising interest rates this year, in my view it will be one of the last central banks in the world to start lifting interest rates, and probably not until the first half of 2023. And while it’s likely the bank will stop its quantitative easing program shortly, it hasn’t done a great deal other than that to prevent the exchange rate from being stronger than it otherwise would. Does all of this mean that the Australian economy will continue to fare better than others? Probably not, because it faces five other significant medium-term challenges.

Challenges to the Australian Economy

First, Australia will not continue to enjoy a free ride from rising commodity prices, as it has for most of the past two decades. With a few exceptions — perhaps lithium and some food items — commodity prices are more likely to fall than rise over the next 10 years.

Second, population growth may not be the same tailwind as it has been over the past 20 years since it’s not clear whether migration will return to pre-pandemic levels over the next two years. If there is a change of government at the next election, it may well be less enthusiastic about letting in large numbers of unskilled immigrants.

Third, Australia may not be able to attract as many overseas students as it has in the past due to the ongoing deterioration in its relationship with China, which has been a major source of students and tourists. That relationship is likely to continue to create more problems than opportunities in the near term, in marked contrast to the past two decades.

Fourth, Australia faces greater challenges than other advanced economies in reducing carbon emissions and adapting to climate change. In fact, there is perhaps some risk that the nation will be seen as an international pariah because of its reluctance to make greater efforts to reduce carbon emissions, which could in turn see a broader range of its exports subject to so-called carbon tariffs being considered by the U.S. and the European Union.

Finally, there is the potential risk of a housing crisis over the next decade. House prices may fall from their current stratospheric levels or, more likely, housing affordability will continue to deteriorate to the point where governments feel obliged to actually act on the problem rather than just bemoan it.

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About Saul Eslake

One of Australia’s most prominent and experienced business economists, Saul Eslake has more than 30 years’ experience in the Australian financial markets. He currently runs Corinna Economic Advisory Pty Ltd., his own independent economics advisory and consulting business, based in Tasmania. Since April 2016, he has also had a ‘‘fractional appointment’’ as a Vice-Chancellor’s Fellow at the University of Tasmania. From December 2011 until June 2015, Saul was Chief Economist, Australia and New Zealand, at Bank of America Merrill Lynch, one of the world’s largest investment banks.

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This article is adapted from the January 20, 2022, GLG roundtable “Australia Economic Outlook 2022.” If you would like access to similar events or would like to speak with Saul Eslake or any of our more than 700,000 experts, please contact us.