Australia’s economy was the envy of the whole world. Now it lags | Business and economy

Sydney, Australia – When Racheal Clayton was in primary school in Sydney, Australia at the height of the 2007-2009 global financial crisis, Australia’s economy was the envy of governments around the world.

Unlike all other major developed economies, Australia emerged from the worst economic crisis since the Great Depression without entering a recession.

Today, Clayton, 22, navigates the world of work instead of the classroom and an economy whose star shines much less 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 is lagging behind many competitors.

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

If not for population growth fueled by immigration, Australia would effectively be in recession as per capita growth has been negative for seven consecutive quarters.

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

Although she has a full-time job in public relations and lives at home with her parents, she worked part-time as a personal trainer to cover her expenses, including food, bills, insurance and running costs.

“It is a great privilege for me to still live at home. So it’s not that I have to pay rent, but I still have to pay for other things in life,” Clayton told Al Jazeera.

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

Like many countries, prices in Australia have risen in the wake of the COVID-19 pandemic, with inflation at 7.8 percent in December 2022, while wages have stagnated.

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

Clayton said she doesn’t have high expectations of owning a home because it’s hard to build up savings and property is so unaffordable in Australia, one of the most expensive markets in the world.

“I mean [my generations] they are focused on finding safety in other ways,” she said.

“It’s just existence [financially] sure it’s like it’s no longer an option, so you can use your money however you can.”

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

Since recovering from the pandemic, the economy has struggled to take off due to higher interest rates, falling productivity and slowing demand for Australian exports such as iron ore.

Even if Australia isn’t officially in recession, it feels a little different to those struggling to pay their bills despite having a full-time job and a decent income.

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

Much of the financial pressure has been caused by higher mortgage repayments fueled by successive interest rate hikes by the Reserve Bank of Australia (RBA).

After cutting 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 curbing inflation.

In September, Treasurer Jim Chalmers pointed to the higher interest rate environment as the main cause of the slowdown, saying increases were “shattering the economy”.

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

“We know that consumer spending is particularly low in Australia at the moment, accounting for more than half of GDP. And so you know, until consumers in Australia are spending, the economy is going to grow very, very slowly,” Grudnoff told Al Jazeera.

Grudnoff said the ongoing housing shortage was another contributor to the hardships facing many Australians.

Australia will face an estimated 106,300 housing shortage by 2027, according to a report by the National Housing Finance and Investment Corporation (NHFIC).

Grudnoff said the shortage, which is contributing to skyrocketing property prices and rents, has been a problem for years but only gained national attention after the pandemic.

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

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

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

Faced with severe labor shortages following the pandemic, Australia loosened its barriers to international students and skilled migrants in 2022, resulting in record net migration of 547,200 arrivals next year.

Faced with mounting pressure over housing and strained infrastructure, the Labor government announced in 2023 that it would reduce admissions of permanent migrants to pre-pandemic levels and proposed a cap on international student arrivals the following year.

Although the government estimates that net migration for the financial year 2024-2025 will to be 340,000 – about 200,000 less than in 2023 – that would still be 80,000 more than the target.

Trent Wiltshire, deputy director of the Economic Prosperity and Democracy Program at the Grattan Institute, said migration had been a boon to the economy, not the cause of its underlying weaknesses.

“Our standard of living per capita has recently declined and has been pretty stagnant for some time. So that was a problem even before COVID, the fact that our economy was not doing well. So we need productivity-enhancing reforms to start raising living standards,” Wiltshire said.

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

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

Nicki Hutley, an independent economist, said many of Australia’s problems stemmed from a lack of productivity growth and a “robust and intelligent debate on tax and revenue”.

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

While other countries have used the pandemic as an opportunity to invest in future growth drivers such as green energy, Australia has 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 that, we didn’t use that revenue wisely and now we’re right back where we started,” Hutley told Al Jazeera. “Ultimately, Australia is a small, open economy that relies on other countries like China. We need to diversify more.”

“And I think that’s a lesson that every country has already learned after COVID, [which] is to diversify your import and export markets,” she added.

“But you also have to make sure you’re incentivizing investment and have the right frameworks for it.”