In an unsettling trend, Australia has emerged as the frontrunner in a race nobody wants to win. The country has experienced the largest decline in living standards of any advanced economy over the past year, outpacing its peers in the Organisation for Economic Co-operation and Development (OECD). This downturn is primarily fuelled by high inflation, soaring mortgage repayments, and increasing income taxes, collectively gnawing away at the already strained household budgets.
Since June 2019, Australia has seen inflation-adjusted disposable incomes fall for seven consecutive quarters, hitting their lowest ebb. This stark reality isn’t a mere set of numbers on a spreadsheet; it’s a living, breathing crisis unfolding in homes across the nation. It’s not surprising that the cost of living has escalated into the most pressing concern for voters, thereby becoming a significant political challenge for Prime Minister Anthony Albanese’s government.
Australian household incomes have taken a 5.1% nosedive in the 12 months leading up to June, marking the most pronounced fall among OECD nations. In stark contrast, the average living standards across the OECD have risen by 2.6%, with countries like the United States, the United Kingdom, and France witnessing real income growth.
What does this mean in real terms? Australian real household incomes are now only 18% higher than they were in 2007. This figure pales in comparison to the 22% average increase across the OECD. Although Australia’s headline inflation rates may seem more moderate than the OECD average, its nominal wage growth lags far behind that of other advanced economies, such as the UK, Canada, the Euro Area, and the US.
Adding to the economic quagmire, the International Monetary Fund (IMF) has raised red flags over the Australian housing market, ranking it as the second-highest in ‘housing market risk’ among 27 countries. The drivers of this risk are manifold, including high housing debt relative to household income, a significant proportion of housing debt on variable interest rates, and a growing number of homeowners with mortgages. Australia’s unprecedented rate-hiking cycle, along with significant real house price growth observed between March 2020 and March 2022, further complicates the situation.
Australian real household incomes are now only 18% higher than they were in 2007. This figure pales in comparison to the 22% average increase across the OECD
The shadow of economic inequality looms large, with Australia’s Gini coefficient – a measure of income inequality – reaching its highest level since 1950. This inequality spans a spectrum of factors such as age, education, employment status, gender, disability, geographic location, and place of birth. The increasing share of the gross domestic product going to company profits, coupled with falling wage shares and the rise of casual and gig work, are fuelling this disparity.
The repercussions of this economic inequality are profound and far-reaching, dampening consumer spending, reducing the effectiveness of monetary policy, and leading to poorer health and wellbeing outcomes. It’s also exacerbated by persistent issues like the gender pay gap and the influence of educational attainment on personal incomes.
Turning our attention to the broader economic landscape, KPMG forecasts paint a bleak picture of likely economic stagnation in the short term for Australia. With higher interest rates and stubborn inflation biting into output growth, the first quarter of 2023 saw a meagre GDP growth of just 0.2%, primarily driven by domestic demand. This stagnation is symptomatic of a global economic malaise.
But it’s not just about stagnation. There’s a troubling undercurrent of falling productivity amidst rising wages. This could signify businesses scaling up with new staff and equipment or point to deeper structural issues within the economy. The distinction between these two scenarios is critical, as each requires a different set of solutions.
The labour market, once a beacon of hope, is also showing signs of weakness, with projections indicating a rise in the unemployment rate from the current low of 3.6% to above 4% by the end of 2024. Such a trend could exacerbate income decline and further economic challenges.
Inflation dynamics in Australia are particularly noteworthy. A split between goods inflation, which is easing due to normalising supply chains and shipping costs, and services inflation, which remains high, creates a complex landscape. This inflationary environment, coupled with high living costs, constrains the government’s ability to implement expansionary fiscal policies, especially as many economies, including Australia, have exhausted fiscal resources due to COVID-19 support programs.
Australia’s economic narrative is evolving into a cautionary tale. As households navigate through this fiscal tightrope, policymakers face the daunting task of steering the economy towards stability without further straining already burdened citizens. The path ahead is fraught with challenges, and only time will tell how Australia fares in its journey through this economic storm.
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