New research released by the Australian Industry Group (Ai Group) estimates that Australia’s annual rate of growth over the next ten years is set to struggle to reach 3%.
The report: How Fast Can Australia Grow? Mark III is a systematic examination of the growth potential of the economy over the decade ahead. It is based on a careful 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%. If further inroads can be made into unemployment without stretching inflationary pressures, GDP growth could average 3% per year over the next decade.
Australian Industry Group (Ai Group) Chief Executive, Heather Ridout, said: “While a consistent pace of close to 3% is not to be sneezed at, for a country that around a decade ago was dubbed “the miracle economy” it is an outlook that will fall well short of expectations.
“It is a challenging outlook particularly for policy makers intent on expanding the growth capacity of the economy. It confirms the importance of seeking to address capacity constraints and it also establishes the considerable dimensions of this task.
“The findings of the report reinforce calls Ai Group has been making for the need to embark on a new reform agenda focused on improving productivity and participation.
“Annual growth of 3% a year for ten years would see a level of GDP about 34% higher or some $370bn above the current level in real terms.
“If, by adding to productivity and workforce participation — policy makers could build another half a percent to average annual growth over the next decade – and this would be quite a stretch – GDP by 2017 would be over 41% higher than its current level. This would be around $73bn above the level anticipated in How Fast Can Australia Grow? Mark III.
“Any such additional increases will significantly add to our ability to address challenges such as climate change and the ageing of the population.
“This analysis should form a key part of the contextual framework for the 2020 Summit, defining as it does the economic possibilities and the task before us,” Ridout said.
The key findings in How Fast Can Australia Grow? Mark III 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%.
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% over the past five years, the 10-year annual outlook is for growth around 1.25%. When combined, these labour productivity and labour supply growth estimates put GDP growth at around 2.9%. 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%. In 1995 one of Ai Group’s predecessor organisations, the MTIA, produced the initial report How Fast Can Australia Grow? looking at prospects to 2000. Five years later Ai Group released How Fast Can Australia Grow? Mark II.
The second study dissected Australia’s growth potential over the opening ten years of the current century. Both reports stack up very well against the statistical record.
In the original How Fast Can Australia Grow, potential GDP for the period 1996 to 2000 was estimated at between 4.25 and 4.5%.
Actual annual GDP growth was 4.2% over this period. In 2000 How Fast Can Australia Grow Mark II estimated that potential GDP had fallen to between 3.25% and 3.5% and was set to fall further over the decade to 2010.
In the years 2001-2007, actual GDP growth has averaged just under 3.2%. The full discussion paper can be downloaded from www.aigroup.asn.au.