Deloitte Access Economics Business Outlook

22 OCTOBER 2024: With the worst of the post-pandemic inflationary surge in the rear-view mirror, the Australianeconomy finds itself struggling under the burden of deepening structural challenges that threaten to further erodeliving standards unless urgently addressed.

At the start of this calendar year, Deloitte Access Economics noted that ‘by the end of 2024, the primary economic challenge for the country will not be lowering the rate of inflation, it will be lifting the rate of growth’, and that this will be the year that ‘Australia reverts back to the economy seen in the years before the pandemic’. As Christmas rapidly approaches, those sentiments ring true.

Releasing the September 2024 edition of the flagship Business Outlook report, Deloitte Access Economics Partner and report co-author, Cathryn Lee, “It is easy to forget how the Australian economy was tracking prior to the onset of the COVID-19 pandemic. The summary, in simple terms: not well.

“Economic growth for the 2019 calendar year was a miserly 1.8% – at the time, the slowest rate of growth in any calendar year since 1991 – while late in the year the Reserve Bank cut the cash rate to just 0.75%.

“Almost five years on, and for all the disruption caused by the pandemic, a lot feels the same. Most notably, the important, structural challenges facing the Australian economy remain.”

“These structural challenges largely exist on the supply-side of the economy, which consists of three key drivers: population, participation, and productivity. Right now, all three are in focus.”

Deloitte Access Economics Partner and report lead author, Stephen Smith said: “The RBA is of the view that the level of demand in Australia is too high relative to supply, and that this is putting upward pressure on prices. That is debateable given that an economy’s supply capacity can only be estimated, not observed. For example, estimates from the Organisation for Economic Cooperation and Development suggest not only that demand is lagging supply ,but that the gap is widening.

“Even if it is the case that the level of demand in Australia is too high relative to supply, surely the solution is to lift supply through improved productivity, not to crush demand with higher interest rates.

“Political support for migration, and therefore population growth, has stalled. The participation rate is maxing out as cost-of-living pressures push more and more Australians into the labour force, with the number of workers holding down multiple jobs recently reaching record highs.

“That leaves productivity the key to sustainably lifting the supply capacity of the economy.”

“Nobody should pretend that boosting productivity growth is easy. But some of the more obvious opportunities are being left on the table.

“Reform drums seem to beat louder each year, and yet action on reform remains stalled. To be clear, tinkering is not tax reform, and renovating institutions is not restructuring or rebuilding. Two decades without major reforms have left Australians with a sluggish and uninventive economy full of oligopolies in key sectors.”

September’s Business Outlook also contains a material downgrade in Deloitte Access Economics’ expectations for housing construction. In earlier editions, the potential for the construction sector to find its feet underpinned thed expectation of an upswing in construction activity through 2025. Not any longer.

Stephen Smith said: “The construction sector has been dogged by difficulties since the onset of the pandemic, including high wage and materials costs, labour shortages, restricted site access and, ultimately, a squeeze on profits.

“Adding to those woes is the fact that although construction costs are no longer accelerating, neither are they declining. With permanently higher construction costs, the sector will be both unwilling and unable to lift supply unless property prices also lift. That is, housing affordability will get worse before it has a hope of getting better.

“Deloitte Access Economics has revised down the forecast of dwelling activity in this edition of Business Outlook. Fewer than 1 million new dwellings are now expected to be built over the next five years, well below the Federal Government’s target of 1.2 million homes.”

Cathryn Lee added: “Housing and rental costs have also been exacerbated by higher interest rates – but with inflation declerating and economic growth weak, the case for a rate cut is getting stronger. While the timing remains uncertain, Deloitte Access Economics expects that subsequent inflation prints will lead the RBA to start cuttinginterest rates in February 2025.”

Deloitte Access Economics is expecting economic growth in Australia of just 1.2% for the 2024-25 financial year, accelerating to just 1.9% in 2025-26.

Key forecasts: Deloitte Access Economics Business Outlook, September 2024

Business Outlook is a quarterly publication presenting detailed economic forecasts and commentary to help understand the economic forces shaping the business environment. The forecasts cover a detailed assessment of the national economy, world growth prospects, each of Australia’s states and territories, and industries.