What’s Gone Wrong With Australia’s Economy?

For most of the past 50 years or so, Australia's economy has been the envy of much of the Western world.A combination of a reliable, commodity -oriented export base and a strong domestic economy allowed Australia to weather basically every major global economic crisis without entering recession, helping it earn the nickname the Lucky Country.That was until the pandemic.Like everyone else, Australia suffered a recession, its first in over 30 years.But unlike everyone else, and more pertinently, Australia has since failed to recover.Inflation has proved particularly sticky in the lucky country, and on a per capita basis, GDP has been basically stagnant for the past few years.

According to polling by the Laue Institute, Australians are now more pessimistic about the economy than at any time in the past 20 years.So in this video, we're going to try and figure out what's gone wrong with the Australian economy, and explain why the answer might be simpler than you think.

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So, the key thing to understand here is that until really quite recently, Australia's economy has looked uniquely resilient.Australia's GDP grew every quarter from 1991 until the pandemic in 2020, the longest consecutive streak in world history.This was in large part because Australia's economy has two things that rarely come together, an abundance of natural resources and a strong domestic economy.When it comes to natural resources, Australia has vast deposits of metals and hydrocarbons, including iron, coal, oil, gold and lithium.which it exports around the world, especially to booming economies in Asia like China.If you just looked at Australia's export profile, you'd probably assume it was a low or middle income country, dependent on commodity exports.

But that's not the case at all.Australia also has an impressive non -commodity economy, centred around advanced services, including world -beating education, technology and financial sectors.This has all made Australia one of the richest countries in the world, with a GDP per capita somewhere between Germany and the Netherlands, and incredible levels of collective wealth.According to the most recent UBS Wealth Report, for instance, Australians have the third highest median wealth in the world, behind only Luxembourg and Belgium.Furthermore, this combination of a reliable export base and a relatively strong domestic economy has allowed Australia to weather almost every financial storm.Its strong domestic economy, for instance, has helped it weather the Asian financial crisis in the late 90s, which crippled its largest trading partner, Japan.

And a commodity boom, driven by Chinese demand, allowed Australia to sail through 2008.However, as we detailed in the intro, it's all gone a bit pear -shaped since the pandemic.GDP has apparently grown, but that's only because of immigration, and once you account for population growth, things don't look so great.If you also account for the fact that Australians are working more hours, things look even worse.Australian productivity, measured as output per hour worked, has barely grown in the past decade, underperforming basically every other developed country.This is presumably the main reason that, according to the latest OECD data, in real terms, Australian wages have actually fallen by about 5 % since the pandemic.

So what's gone wrong?Well, there are some sexy geopolitical reasons at play here.Australia has been affected by Trump's tariffs, for instance, given that the US used to be Australia's largest export market outside of Asia.Australia is also struggling to deal with China.economic slowdown and Beijing's continued push for self -sufficiency, exemplified by Xi's Made in China 2025 initiative.This is all an especially acute problem for Australia because China has long been Australia's largest export market, but Australian exports to China peaked in 2023.

Conversely, Australian imports from China have been ticking up, resulting in an ever narrower trade balance.But while geopolitics might have been playing a part, as we see it, the main problem facing the Australian economy is actually a more pedestrian one, namely a lack of investment.In short, since really about 2013, private sector investment in Australia has trended down about 25%, falling from a pre -2013 average of about 17 % of all economic activity to a post -2013 average of more like 13%.Things look even worse when you exclude mining.In the rest of the economy, investment has fallen from 14 % of GDP to more like 10%.This would be consistent with OECD data, which found that, between 2008 and 2023, Australia suffered a steeper decline in business investment than basically any other large economy, and had a larger so -called investment gap than any other OECD member apart from Norway and the Netherlands.

So what's gone wrong here?Well, it might be in part because Australian firms have been resting on their laurels.This is sort of understandable.Until recently, the Australian economy looked like it was doing pretty great, so firms probably didn't think they needed to invest so much to keep up with the rest of the world.But there's also a more structural issue at play here.Namely, that Australian banks allocate too much credit to housing investment rather than business investment.

This might sound boring or technical, but the basic idea is pretty simple.A banking system can only lend so much money, so when it lends more of that money to housing, it mechanically lends less money to businesses.This makes it harder for businesses to buy.which they often need in order to invest.This is especially the case if you don't have a well -developed non -bank capital market.In other words, a network of private and institutional investors who can do the lending instead.

Which is basically the case for everyone apart from the US and a couple of other big economies.Anyway, in Australia, the percentage of bank credit going to housing, which in practice mostly represents homeowners taking out mortgages, really started rising in the late 2000s and early 2010s.It's probably not a coincidence that investment in the non -mining private sector started falling about the same time.Furthermore, even when Australian banks do lend to businesses, they tend to lend to businesses that own property, because Australian banks see property as sort of their ideal form of collateral.This is all both a symptom and cause of Australia's property crisis, characterised by high and rising real estate prices.This has encouraged not just households, but also banks and businesses to plough all their money into property, starving the rest of the economy of investment.

And, well, this dearth of investment is also plausibly the main reason that Australia's productivity, that is, output per hour, has slumped in recent years.After all, without investment, workers don't have the tools to become more productive.According to OECD data, Australian productivity has actually declined between 2015 and 2025.Weak productivity growth would also explain why inflation has proved remarkably sticky in Australia.If wages outstrip productivity, then you'll end up with more money in the economy, but less stuff, because workers aren't producing enough stuff.Ultimately, if this analysis is correct, it should all serve as a reminder of how sky -high house prices can be bad not only for prospective first -time buyers, but also for the economy as a whole.

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