Deloitte Access Economics Business Outlook: Supply stumbles
Nobody should pretend that boosting productivity growth is easy. But some of the more obvious opportunities are being left on the table.
The Australian economy is growing at its slowest annual rate – excluding the pandemic – since the early 1990s recession. Inflation and high interest rates have put pressure on many households and businesses, while dwelling investment has been weighed down by a lack of capacity in the construction industry.
But conditions are unlikely to weaken further from here. The pace of growth in the economy is expected to lift through the end of 2024 and 2025 as higher household incomes support gains in spending. It will take slightly longer for dwelling investment to meaningfully recover, while some areas of previous strength – such as net exports and population growth – are expected to add less to the economy over the coming years.
In the latest edition of Business Outlook, Deloitte Access Economics is forecasting economic growth in Australia of 1.1% for the 2024 calendar year, accelerating to just 1.6% in 2025. These forecasts are below those in the International Monetary Fund’s World Economic Outlook released today (Australian time) which forecast growth of 1.2% in 2024 and 2.1% in 2025.
This edition of Business Outlook also contains a material downgrade in Deloitte Access Economics’ expectations for new dwelling commencements. In earlier editions, the potential for the construction sector to find its feet underpinned the expectation of an upswing in construction activity through 2025.
Not any longer.
The construction sector has been dogged by difficulties since the onset of the pandemic, including high wage and materials costs, a shortage of labour, restricted site access and, ultimately, a squeeze on profits.
The sector is gradually working through the significant number of dwelling projects under construction in Australia at present. But doing so leaves very little spare capacity to start new projects. Adding to the woes is the fact that although construction costs are no longer rising, neither are they falling.
All told, Deloitte Access Economics is now expecting construction to start on fewer than 1 million homes in Australia over the five years to 30 June 2029.
Chart 1: Australian GDP growth forecast
Source: International Monetary Fund, Deloitte Access Economics
With the worst of the post-pandemic inflationary surge in the rear-view mirror, the Australian economy finds itself struggling under the burden of deepening structural challenges that threaten to further erode living standards unless urgently addressed.
These structural challenges largely exist on the supply-side of the economy, which consists of three key drivers: population, participation, and productivity.
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.
This newsletter was distributed on 23rd October 2024. For any questions/comments on this week's newsletter, please contact our authors:
This blog was co-authored by Alex Scaife, Manager at Deloitte Access Economics
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