Australia’s economy was the envy of the world. Now it’s falling behind | Business and Economy

Sydney, Australia – When Racheal Clayton was attending primary school in Sydney, Australia at the height of the 2007-2009 Global Financial Crisis, the Australian economy was the envy of governments around the world.

Unlike every other major developed economy, Australia emerged from the worst economic downturn since the Great Depression without going into recession.

Today, Clayton, 22, is navigating the world of work instead of the classroom, and an economy whose star is shining much less brightly on the international stage.

Far from being the envy of the developed world, Australia’s economy is growing at its slowest pace since the early 1990s, excluding the COVID-19 pandemic, and lagging many of its peers.

Australia’s gross domestic product (GDP) grew by just 0.8 percent year-on-year during the first three quarters of 2024, compared with expansions of 3.1 and 0.9 percent in the United States and the Eurozone, respectively.

If not for immigration-driven population growth, Australia would actually be in recession since per capita growth has been negative for seven consecutive quarters.

Like many of her peers, Clayton, who graduated from university in 2022, is pessimistic about the country’s economic outlook.

Even though she has a full-time job in public relations and lives at home with her parents, she has taken on a part-time gig as a personal trainer to help cover her expenses, including food, bills, insurance and the cost of running a car.

“I am very privileged to still live at home. So it’s not like I have to pay rent, but I still have to pay for other things in life,” Clayton told Al Jazeera.

“If I take a little bit of a break from my part-time job, I find myself struggling,” she said.

Like many countries, Australia’s prices surged in the aftermath of COVID-19, with inflation peaking at 7.8 percent in December 2022, while wages stagnated.

While wages across the OECD have risen by an average of 1.5 percent since 2019, Australia’s real wages were still 4.8 percent below pre-pandemic levels as of last year, according to the OECD data.

Clayton said she does not have much of an expectation of owning a home because it is difficult to build up savings and property is so unaffordable in Australia, one of the world’s most expensive markets.

“I think [my generations] are focused on finding security in other ways,” she said.

“It’s just being [financially] safe is like no longer an option, so you may as well use your money however you can.”

After emerging from recession in 1992, Australia recorded a record-setting 28 straight years of uninterrupted economic growth until the world was hit by COVID in 2020.

Since bouncing back from the pandemic, the economy has struggled to take off amid higher interest rates, sagging productivity and slowing demand for Australian exports such as iron ore.

Even if Australia is not officially in recession, it feels little different from one for those struggling to pay their bills despite having a full-time job and a decent income.

Before Christmas, a survey by the Salvation Army Australia found that one in four Australians were concerned that their children would miss out on presents and 12 percent were worried their children would miss out on food.

Much of the financial strain has been caused by higher mortgage payments prompted by successive interest rate hikes by the Reserve Bank of Australia (RBA).

After lowering the benchmark rate to near zero in response to the pandemic, the RBA raised the rate to 4.35 percent in a series of moves aimed at taming inflation.

In September, Treasurer Jim Chalmers pointed to the higher interest rate environment as a major cause of the slowdown, saying the hikes were “smashing the economy”.

Matt Grudnoff, a senior economist at the Australia Institute think tank, said the RBA had played “a large part” in the country’s current economic struggles.

“We know that consumer spending is particularly low in Australia at the moment, and that makes up more than half of GDP. And so you know, while consumers in Australia aren’t spending, the economy is going to grow very, very slowly,” Grudnoff told Al Jazeera.

Grudnoff said the ongoing housing supply shortage is another contributor to the hardship faced by many Australians.

Australia is estimated to face a 106,300 shortfall of dwellings by 2027, according to a report by the National Housing Finance and Investment Corporation (NHFIC).

Grudnoff said the shortage, which is contributing to soaring property prices and rents, has been an issue for years but only caught national attention in the aftermath of the pandemic.

“I think it’s just because we haven’t had high inflation [before],” Grudnoff said.

“The reality is that until you have a crisis, often it’s easy to ignore problems,” he added.

With a federal election looming next year, politicians of both major parties have looked at reducing migration as a way to ease cost-of-living pressures.

Facing major labour shortages after the pandemic, Australia loosened its barriers for international students and skilled migrants in 2022, resulting in a record-breaking net migration of 547,200 arrivals the following year.

Facing growing pressure over housing and strained infrastructure, the Labor Party government in 2023 announced it would slash the intake of permanent migrants to pre-pandemic levels and the following year proposed a cap on international student arrivals.

While the government estimates net migration for the 2024-2025 financial year to come in at 340,000 – about 200,000 fewer than in 2023 – that would still be 80,000 more than its target.

Trent Wiltshire, deputy director of the economic prosperity and democracy programme at the Grattan Institute, said migration has been a boon for the economy and not the cause of its underlying weaknesses.

“Our per capita living standards have been going backwards recently and have been pretty stagnant for a while now. So it was a problem pre-COVID as well, the fact that our economy wasn’t performing as well as it should. So we need productivity-enhancing reforms to start getting our living standards going up,” Wiltshire said.

“It’s certainly not the cause of the weakness,” Wiltshire added, referring to the effect of migration in propping up growth. “So that’s an important distinction to make.”

In late December, the Labor government released its midyear economic outlook, predicting GDP growth of 1.75 percent and a $26.9bn deficit in 2024-25, the first since the party came to power in 2022.

Nicki Hutley, an independent economist, said that many of Australia’s problems stem from a lack of productivity growth and a “robust and intelligent discussion on taxes and revenues”.

Hutley said successive governments’ approach to spending and investment had laid the foundation for the economy’s current weakness.

While other countries had used the pandemic as an opportunity to make investments in future growth drivers such as green energy, Australia had spent money without any sense of long-term vision, she said.

“We spent money on building houses that would have been built anyway. We didn’t do it, we didn’t use that income wisely, and now we’re back exactly where we started,” Hutley told Al Jazeera. “And ultimately, Australia is a small, open economy that’s reliant on other countries like China. We need to diversify more.”

“And I think that’s the lesson that every country has already taken after COVID, [which] is diversification of your imports and export markets,” she added.

“But also that you need to make sure that you encourage investment and that you have the right frameworks to do that.”