Australia cannot revive its economy without climbing the productivity mountain

Australia’s economy grew 2.1% in the year to the end of June, a result that may have relieved Treasurer Jim Chalmers after warnings of possible stagnation. Yet the figures offered little comfort to households already struggling with high living costs.

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Australia's economy has been getting bigger mostly because we have more people.

Economists quickly raised their expectations of another interest-rate increase. Real wages have fallen by more than 5% over the five years since 2021, while the extended conflict in the Middle East has added to economic pressure. Changes in the budget have also unsettled the housing market.

Public confidence is weak. Nearly six in 10 respondents to an Essential poll said Australia was heading in the wrong direction. The government says it understands the pressure and is using the right policy tools, while the opposition attacks high public spending. Many voters no longer trust either side’s economic message, and some are turning their frustration into support for One Nation.

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depressingly weak

Economist Chris Richardson said growth had slowed as interest rates rose. Over the longer term, he said, “Australia's economy has been getting bigger mostly because we have more people.” The economy is only 1% larger per hour worked than it was a decade ago, a result he called “depressingly weak.”

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frustratingly slow to come to heel

Richardson said inflation had been “frustratingly slow to come to heel” and remained around 3.5%, despite the economic slowdown. He attributed the combination of weak growth and lingering inflation to a stalled productivity engine. He expects one more rate increase, either this month or in November, followed by one or two cuts next year. But he said higher rates could become the new normal. Housing prices, already down about 4%, could fall another 6% before stabilizing, he said.

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But not more than that: higher interest rates look set to be the new normal