How fast can Australia grow? Mark III

Economics Australia

This report estimates that Australia’s annual rate of growth over the next ten years will struggle to reach 3 per cent. The report is based on an analysis of developing trends in labour productivity and labour supply - the component parts of potential GDP.

The report estimates potential annual GDP growth at around 2.9 per cent. If further inroads can be made into unemployment without stretching inflationary pressures, GDP growth could average 3 per cent per year over the next decade.

The key findings of the report include:

• Over the next decade to 2017, Australia is on track to post average annual labour productivity growth in the broad order of 1.67 per cent. That is somewhat higher than recent poor performances but well below the levels recorded in the 1990s. The productivity estimate incorporates a continuation of strong capital investment.

• Expansion of the workforce is decelerating as participation stabilises and hours of work retreat. Compared to labour hours growing by 1.77 per cent over the past five years, the 10-year annual outlook is for growth around 1.25 per cent.

• When combined, these labour productivity and labour supply growth estimates put GDP growth at around 2.9 per cent. This is a further deterioration from the level of the 1990s.

• In contrast to some predictions that Australia has already reached the point where unemployment cannot fall further without triggering inflationary pressures, our analysis is more circumspect and we find that there is further scope to test our ability to reduce unemployment and underemployment before we see wage pressures fueling inflation. These further inroads could lift average GDP growth to 3 per cent.

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