Deloitte warns Australian economy facing longest period of sub-par growth since 1990s recession
Updated ,first published
Working Australians are experiencing one of the sharpest declines in real wages in the developed world; new research reveals households are struggling under “persistent pressures” that are likely to continue next year and beyond.
One of the country’s top economic forecasters has predicted that the country’s economy faces its longest period of below-average growth since the early 1990s recession, while the OECD’s annual look at the global labor market noted that Australians’ real wages have fallen by 5 per cent since early 2021.
In the last five years, the median home price has increased by 45 percent, or almost $333,000. This includes increases of 32 per cent in NSW, 14 per cent in Victoria, 89 per cent in Queensland and 90 per cent in Western Australia.
Of the 37 rich countries the organization tracks, only New Zealanders have seen their post-inflation wages fall more sharply than Australians over the same period. By contrast, real wages in Britain rose by almost 8 percent.
Since March, wages have increased by 3.3 percent. However, inflation increased by 4.6 percent in the same period.
The OECD said Australians’ real wages contracted marginally last year but the more “worrying” problem was the sharp decline since 2021, which was among the world’s “shartest declines”.
“This continued erosion in purchasing power points to persistent pressures on household incomes, even though the labor market remains generally solid,” the report said.
Australia was one of 11 developed countries where the real minimum wage fell last year, “putting further pressure on the incomes of the lowest-paid workers”, according to the OECD.
The minimum wage in Australia was increased by 4.75 percent last week, providing wage increases for 3 million people above inflation in reward salaries. The start of the new fiscal year also marked the beginning of a modest tax cut of up to $5 a week for all workers.
The federal budget predicts inflation will easily outpace wages throughout the just-completed fiscal year before rebounding in 2026-27 as price growth eases.
But on Tuesday Deloitte Access Economics said it believed Australians should prepare for further real wage shortages this financial year.
Deloitte expects the economy to slow sharply in the coming months, with GDP growth falling below 2 percent this fiscal year. This would be the first consecutive years of growth below 2 percent since the end of the 1990-91 recession.
The slow growth will be accompanied by continued inflation, which Deloitte believes will remain around 4 per cent until 2026-27 before falling to 2.6 per cent in 2027-28.
High inflation means real wages are expected to decline by a further 0.7 percent this year. Unemployment is expected to rise from the current level of 4.4 percent to 4.9 percent in 2026-27 and then to 5 percent the following year.
Deloitte partner Stephen Smith said the war against Iran and the rise in inflation this year had exposed economic vulnerabilities that had developed in recent years.
“For too long, strong population growth has masked weak underlying productivity performance and boosted overall growth with less effort to improve living standards,” he said.
“Inadequate investment in housing, infrastructure, energy and the economy’s production capacity for years has caused the supply side of the economy to have difficulty keeping up with demand.”
Deloitte expects the Central Bank to raise official interest rates once again this year, most likely at its August meeting. This would increase the cash interest rate to 4.6 percent.
But financial markets believe the Reserve’s next move is much more likely to lead to cuts. A rate cut by September next year is now fully priced in, with a 50 per cent chance of a second rate cut by Christmas.
Cost of living pressures remain the biggest weight on the economy, Smith said.
He said that mortgage repayments, which increased by $350 per month in the average mortgage loan due to the three interest rate increases made by the Central Bank this year, and high rent, insurance, food and electricity prices shook households.
“Households remain under pressure. Tax cuts, nominal wage increases and higher minimum wages and bonus wages from July will provide some support,” he said.
“But these offsets are being tested by renewed inflationary pressure, high borrowing costs, unstable fuel and transport costs and weak confidence.”
Finance Minister Jim Chalmers said nominal wages had risen by more than 3 per cent for 15 consecutive quarters, the longest streak in at least 15 years. But he acknowledged Australians were feeling the cost-of-living pain.
“Real wages were going backwards badly when we took office, falling 3.5 percent in the quarter we were elected, and falling in the five quarters leading up to our election,” he said.
“The underwhelming story of this government has been one of real wage growth, with annual real wages rising in 8 of the last 10 quarters.”
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Shane Wright is senior economic correspondent for The Sydney Morning Herald and The Age.Connect with: X or email.
