Australia’s economy is “normalising” after the pandemic shocks but still faces major challenges around productivity and housing affordability.
An OECD overview of the Australia economy, released last week, concluded that there were signs of recovery towards the previous “trend path”.
This followed sluggish growth and weak domestic demand in 2023 and 2024.
“While employment growth has remained relatively robust, overall productivity growth has been relatively weak, although some normalisation is in prospect on these fronts,” the report said.
“Australia enjoys high living standards, but experienced weak growth in recent years and real disposable incomes declined markedly as the post-pandemic inflation surge eroded real wages and entailed bracket creep and rising mortgage payments.”
The report said competition had waned across the economy over the past two decades, as business dynamism declined and market concentration and profit margins rose.
It said the expected more stable economic growth and inflation environment created the potential to focus on steadily reducing the Federal Budget deficit and improving the efficiency of the tax system.
“To address high housing costs in many Australian cities, land-use restrictions should be eased to allow more and denser housing construction,” the authors said.
“To make further progress in addressing the climate transition, the government should develop a strategy to reduce emissions from agriculture and gradually raise taxes on motor fuels.”
The report said output and employment grew at a solid pace in the years prior to the pandemic.
However, productivity growth has been slow in recent decades, while housing costs had risen strongly and carbon emissions remained high.
“Productivity growth in the five years prior to the pandemic was around half the average of the previous half century,” the report said.
“This (was) partly driven by developments in the mining sector and the expansion of the non-market sector, which is labour intensive and where productivity is difficult to measure.
“Shifts in the geopolitical environment and digitalisation will require Australia to adapt.”
Immigration had rebounded strongly following pandemic-related disruption while the unemployment rate has remained below pre-pandemic levels.
“The economy will continue to recover in response to the easing of interest rates and the rebound in real disposable incomes,” the report concluded.
“Investment and private demand are set to grow more rapidly as public consumption growth eases.
“Overall, GDP growth is forecast to average a little more than two percent over the coming years, slightly above its trend rate.
“Australia faces risks from shifts in the global economy. Exports depend significantly on the strength of demand and construction activity in China. Shifts in global supply chains related to higher trade restrictions in the world since 2025 could impact demand for Australian products.”
The full report is available here
