Economic growth to slow to 1.2% in 2024-25: Deloitte

The looming US election was also a focus of the outlook. Deloitte cites Peterson Institute for International Economics modelling that indicates that Donald Trump’s plan to increase US tariffs on China by 60% would cause a long-term ripple effect across the world and may hit Australia’s GDP by 0.3% in 2035.

The context: Economists have been encouraging the federal government to look at structural reforms to secure gains in productivity to help improve living standards and lift supply, without requiring higher interest rates. Deloitte is among those seeking a focus on "obvious opportunities" to lift productivity, including making product markets more competitive, rebuilding institutions and undertaking broad-based tax reform.

Another significant debate underway is the level of government spending and whether it has been too strong during the fight against inflation. Deloitte expects government consumption to account for a rising share of the economy into the future and notes there is a growing list of spending priorities. This includes the Productivity Commission’s recommendation for universal childcare, which Deloitte said is “worthwhile” but “come at a significant cost”.

What they said: “Reform drums seem to beat louder each year, and yet action on reform remains stalled. To be clear, tinkering is not tax reform, and renovating institutions is not restructuring or rebuilding. Two decades without major reforms have left Australians with a sluggish and uninventive economy full of oligopolies in key sectors,” Deloitte Access economics partner and report lead author Stephen Smith said.

“...The construction sector has been dogged by difficulties since the onset of the pandemic, including high wage and materials costs, labour shortages, restricted site access and, ultimately, a squeeze on profits.

“Adding to those woes is the fact that although construction costs are no longer accelerating, neither are they declining. With permanently higher construction costs, the sector will be both unwilling and unable to lift supply unless property prices also lift. That is, housing affordability will get worse before it has a hope of getting better."

Deloitte Access economics partner and report co-author Cathryn Lee said it is easy to forget that the economy was not performing too well pre-pandemic.

“Economic growth for the 2019 calendar year was a miserly 1.8% — at the time, the slowest rate of growth in any calendar year since 1991 — while late in the year the Reserve Bank cut the cash rate to just 0.75%,” Lee said.

“... Almost five years on, and for all the disruption caused by the pandemic, a lot feels the same. Most notably, the important, structural challenges facing the Australian economy remain.

"These structural challenges largely exist on the supply-side of the economy, which consists of three key drivers: population, participation, and productivity. Right now, all three are in focus.”

Treasurer Jim Chalmers responded to the report in a statement, saying that the government’s primary economic focus had been handling inflation “without ignoring the risks to growth”.

“We’re coming at this inflation challenge from every conceivable and responsible angle and Deloitte’s report confirms our policies are making a real difference,” Chalmers said.

“... We have an ambitious economic reform agenda including our competition reforms, our plans to modernise markets, our investments in skills and new industries and our reforms to streamline and strengthen approvals processes.

“We’re not complacent because we understand the risks to growth, including from global uncertainty and geopolitical tensions which are outlined in the report.”