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Australian economic recovery to begin in 2025: OECD

By Rhea Nath
4 minute read

Amid concerns of where the Australian economy could land this year, the OECD has cautioned of a slow year ahead, dampened by higher interest rates and elevated services inflation.

Latest projections from the Organisation for Economic Co-operation and Development (OECD) suggest real GDP growth in Australia will slow to 1.5 per cent this year before recovering to 2.2 per cent in 2025.

However, stickier-than-expected services inflation could threaten this recovery by raising interest rates more than currently assumed, the OECD warned, as could a sharper-than-expected slowdown in the Chinese economy weakening demand for Australian exports.

“The impact of higher interest rates will continue to damp spending by households and businesses over the coming year,” the OECD observed in its latest economic outlook.

“The unemployment rate is projected to rise further, reaching 4.3 per cent in 2025. Price pressures will continue to ease, although inflation of some services components is anticipated to remain elevated throughout 2024.

“A downside risk to economic growth is that taming stubborn services inflation may require tighter monetary policy than currently assumed.”

Presently, it believes monetary policy “should remain restrictive” in the short term in order to combat inflation and suggested the fiscal deficit should be narrowed in the coming years.

According to the OECD’s economic outlook in May, real GDP growth in Australia slowed to 0.2 per cent in the fourth quarter of 2023. With spending on discretionary items falling by 0.9 per cent over the quarter, consumption remained weak, it observed, even as investment in machinery, equipment, and private dwelling declined.

During this time, labour market tightness abated slightly, with the unemployment rate rising from its low of 3.5 per cent in October 2022 to 3.8 per cent in March 2024.

Through the course of this year, fiscal policy is poised to support the economy, the OECD said, noting the cash rate will be held at “restrictive” levels on the path to the Reserve Bank of Australia’s (RBA) inflation target.

“The Reserve Bank of Australia has kept the cash rate stable at 4.35 per cent since November 2023. The projections assume that the cash rate will be held at this restrictive level until inflation is clearly declining to the target band, with 75 basis points of interest rate cuts assumed between the third quarter of 2024 and the end of 2025.

“The underlying budget deficit is projected to increase in 2024, as cuts to statutory personal income tax rates and changes to tax brackets come into effect. These measures return the proceeds from bracket creep in previous years to households, arising from a progressive personal taxation system that does not have indexation of tax thresholds.”

Globally, the OECD projected GDP growth of 3.1 per cent in 2024 and 3.2 per cent in 2025.

Although these figures are lower than the growth rates seen in the decade preceding the Global Financial Crisis, they are in line with current estimates of potential growth rates in both advanced and emerging market economies, the OECD said.

“Cautious optimism has begun to take hold in the global economy, despite modest growth and the persistent shadow of geopolitical risks,” observed Clare Lombardelli, OECD chief economist.

She pointed out that “substantial concerns” remain, with the potential of geopolitical tensions, particularly in the Middle East, to cause inflation to spike by disrupting energy and financial markets.

“Debt-service burdens are already significant and could rise further as low-yielding debt is rolled over or fixed-term borrowing rates are renegotiated. Expectations that inflation will continue to decline steadily might also prove misplaced,” she added.

In January, the World Bank warned of rough tides ahead, noting the global economy in 2024 would record the slowest half-decade of GDP growth in 30 years.

While the end of 2024 marks the halfway point of what was envisioned as a transformative decade for development, it acknowledged the looming risk of it turning into a “wretched milestone” – the weakest global growth performance of any half-decade since the 1990s.

Noting that although the likelihood of a global recession has diminished, the World Bank said at the time that the majority of advanced and developing economies are poised for slower growth in 2024 and 2025, compared to the decade preceding the COVID-19 pandemic.