The State of the Australian Economy

I am seeing posts on X (formerly Twitter) and Bluesky that argue all is well with the Australian economy. The stylised facts go something like this:

• Unemployment is at 4.0 per cent
• Headline inflation is at 2.3 per cent / year
• Wages growth is at 3.5 per cent / year (well above inflation)
• The stock market is at record highs
• Household Wealth is at a record high

And in the main these statistics are correct, although arguably some are in part misleading. More fundamentally, these statistics are cherry picked: Good statistics are highlighted and the more challenging ones are glossed over. I would contend the state of the Australian economy is much more of a mixed bag. There are definite strengths. But there are also challenges. And, importantly, there are pain points arising from the economic trajectory since the COVID pandemic notwithstanding the current good news. Let's begin with the strengths.

The Strengths

Unquestionably, the currently low unemployment rate (compared with the period since the mid 1970s) is good news. While the unemployment rate has been lower, it has not consistently been so for 50 years.

Focusing on the latest monthly data, the rate is currently at 4.0 per cent, and the trend appears to be downwards.

The only caveat is whether the unemployment rate can be sustained at this level without putting upwards pressure on inflation. This Phillips curve suggests there may still be some tension here.

As we will see in the next two charts, while the monthly CPI indicator suggests headline inflation is at 2.3 per cent (largely due to government subsidies and measurement issues), underlying inflation remains above the target band. The next quarterly inflation print will be on Wednesday this week.

Nonetheless, across all measures, inflation has been slowly returning to target since peaking around December 2022. Unquestionably good news.

Wages growth for the September quarter was at 3.5 per cent, the same as Trimmed Mean in flation, but below headline inflation. 

This is good for workers. However, since the pandemic, the consumer price index (inflation) has grown faster than wages. In real terms, workers are out of pocket, and have some way to go to get back to the pre-pandemic situation. This is one of the pain points in the economic trajectory of the nation after the pandemic. 

The stock market is near record highs. Technically it peaked in early December 2024, with the All Ords Index at 8754.7. The index is currently at 8660.4, up almost 11 per cent on where it was a year ago. It is a similar story with the ASX S&P/200 Index, up a touch over 11 per cent on where it was a year ago.

In aggregate, the net worth of households as shown in the ABS Household Balance Sheet (HBS) is also at a record high.

However, when adjusted for population growth and inflation, we see that real average household net worth has not changed substantially since mid 2022. In this context, record household net worth is not such a compelling story. 

The Challenges

While Australia has avoided a technical recession (two quarters of negative GDP growth), it has seen a substantial and persistent slowdown in GDP growth: in short, stagnation. A multi-year stagnation has more impact on the economy than a short, sharp recession.

The current stagnation appears to be part of a longer-run trend. When we look at the decadal compound average annual growth rate for GDP, we can see it is in slow decline.

The second challenge is labour productivity growth. In the next two charts we can see that the decadal compound annual average growth rate has slumped.

Productivity growth facilitates rising living standards. It allows wages to grow faster than inflation, without putting upwards pressure on inflation. Low productivity growth over the medium term makes it harder to fight inflation. It also makes it harder to grow the economy. 

A third area of concern is global uncertainty, and the risks to global trade. Australia's well being increasingly depends on trade.

China is Australia's largest export market, primarily in natural resources: iron ore and natural gas being the most important. Most analysts predict that the Chinese economy will continue to slow in 2025. This will put downwards pressure on Australia's GDP growth. A second major source of global uncertainty is the new Trump administration in the US. There is some risk that it will impose sizeable tariffs on imports, particularly from China, which will have a flow-on effect with Australian exports.

Pain Points in the Australian Economy

While there are strengths in the Australian economic data, most Australian's experience of the economy is in terms of whether they feel better off now than they did (say) 3 or 5 years ago. Here, the evidence is challenging. 

Unquestionable, interest rates are higher than before the pandemic. That benefits retirees with savings, but disadvantages workers with mortgages. 

Credit card lending rates have recently increased and are the highest than they have been for many years. This rate is often experienced by borrowers on lower incomes. 

When we combine the impact of wages growing slower than inflation (see above), we have a situation where real incomes have dropped on average in the past 3 years.

When combined with increased interest rates (and increased taxes in income), household disposable income is also lower.

Conclusion

The current state of the Australian economy is a mixed bag. There are strengths. There are challenges. And there are pain points.

On the positive side of the ledger we have a low unemployment rate and inflation appears to be coming back to target (albeit more slowly than our international peers). The stock market is up 11 per cent on a year ago. While households in aggregate are wealthier than they have ever been, when we adjust for inflation and population growth, this statistic is less impressive.

Of concern, Australia's GDP growth has stagnated to around 0.8 per cent per year. Australia's labour productivity growth is in the doldrums. And Australia faces a more uncertain world. 

For individuals, their primary concern is whether they are better off than they were (say) two or three years ago. Here the story is not compelling. Years of inflation outpacing wage growth have reduced real ages. Rising interest rates have hit the disposable income of many households. Typically, households are worse off than they were two or three years ago.