Australia faces its most challenging economic outlook in decades as new analysis reveals a dramatic slump in the country's potential growth rate, threatening real wage increases and living standards for millions.
Productivity Crisis Drives Growth Collapse
According to Commonwealth Bank economist Harry Ottley, Australia's potential growth rate - the maximum level an economy can sustain without triggering inflation - has fallen to approximately 2.2 per cent, representing the lowest level in decades. "Potential growth has been in structural decline due to weaker productivity growth," Mr Ottley stated in his concerning assessment.
The economist warned that recent economic data, including inflation figures, suggests the situation may be even worse than anticipated. He identified the rapid expansion of the non-market sector, encompassing public service jobs and National Disability Insurance Scheme spending, as a primary driver of the productivity weakness.
Compounding the problem, Australia's mining sector has also reported declining productivity, removing what was traditionally a strong pillar of the nation's economic performance.
Consequences for Wages and Living Standards
The implications of this growth collapse are severe for Australian households. Economists predict that if potential growth remains at these depressed levels, the country should expect slower increases in real wages and diminished living standards.
Mr Ottley delivered the stark warning that "potential GDP growth is at multi-decade lows" and emphasised that "where it goes from here is key to understanding what the implications are for the Australian economy."
Should the economy experience any unexpected heating, the low potential growth rate also creates significant inflation risks that could further erode household purchasing power.
Structural Challenges and Reform Deficits
The analysis points to deeper structural issues within the Australian economy. Mr Ottley attributed the decade-long productivity decline to a lack of "meaningful" economic reform, noting that "since the peak of the mining investment boom in 2014, Australia's productivity growth – and by extension potential GDP growth – has been falling."
He highlighted that with "meaningful economic reform largely absent - and fewer 'low-hanging fruit' reforms available - growth in multifactor productivity has also slowed materially."
The challenges extend to technological adoption, where Australian businesses have "historically struggled" according to the report. This weakness threatens to delay potential productivity benefits from artificial intelligence and the transition to net zero emissions.
"So arguably Australia is likely to see both less, and a delayed increase to productivity stemming from AI," Mr Ottley cautioned, adding that productivity benefits from the energy transition would only materialise over time, while higher energy costs are already hampering productivity.
The grim assessment was echoed internationally, with OECD secretary-general Matthias Cormann stating that Australia "can and must do better" on productivity. He revealed that labour productivity had grown at just 0.5 per cent annually between 2010 and 2024, well below the OECD average.
Mr Cormann urged Australia to reassess its tax and regulatory settings to attract more capital, specifically suggesting a review of business taxation arrangements compared to other OECD countries like the United States and United Kingdom.
The report places significant pressure on Treasurer Jim Chalmers, who has identified productivity growth as the top priority for the Albanese government's second term. Dr Chalmers recently told the ABC that while the first term focused primarily on inflation "without forgetting productivity," the second term would be "primarily productivity without forgetting inflation."
Economists suggest that higher potential growth could be achieved through stronger business investment, comprehensive economic reforms, greater adoption of technology, and a successful long-term energy transition, though all present substantial challenges for policymakers.
