Australia

Australia: gradual improvement

Australia’s economic performance has improved in the past few years. In 2016, the EPI projects Australia to have a performance score of 92.2%, or a solid B grade. While the economy is improving, it faces a challenge as the mining investment boom winds down and it faces lower global commodity prices.

Its GDP growth of 2.4% in 2015 was relatively modest and is expected to improve to 2.9% in 2016. This is due, in part, to a particularly weak final domestic demand and a decline in public and private investment. Also, because of the lower commodity prices, there are lower tax revenues from iron ore exports going to the government. For the same reason, inflation is low and is projected to be 2.6% in 2016.

The government is on the sustainable path of winding down a fiscal stimulus. Last year’s budget deficit comes in at only 2.4% of GDP with projections of reaching a balanced budget by 2019. Despite this, fiscal consolidation has become more difficult in the current environment and public debt is rising (albeit from a quite low starting point).

The main economic drag on Australia’s EPI score is its unemployment. It’s expected to increase to 6.3%, the highest in the past decade. Still, this unemployment level is below the average for many advanced economies, especially the European ones.

By 2020, Australia’s EPI score will continue to improve, but only gradually: from a current 92% (B) to 95% (A-). Less investment in mining and a sharp fall in revenue from commodity exports pose the primary macroeconomic challenges, and will slow GDP growth. As such, the major positive drivers will be a continued fiscal deficit reduction and lower unemployment levels. In such an environment, though, inflation will likely start picking up, probably reaching 2.5% by 2020 as monetary policy continues to be loose.