The one telling sign that interest rates won’t rise again – in a major win for Aussies with mortgages

Australia is heading into a sluggish year for economic growth that the Organisation for Economic Co-operation and Development warns could be even more muted if inflation proves stubborn or China’s economy slumps.

The OECD’s most up-to-date projections for Australia’s economic activity are largely unchanged from earlier forecasts, with GDP growth tipped to slow from 1.9 per cent in 2023 to 1.4 per cent in 2024.

In 2025, the economy is expected to recover and expand 2.1 per cent.

The OECD also notes that interest rates are projected to hold at 4.35 per cent and stay at that restrictive level until inflation starts coming down convincingly, with cuts expected in the third quarter of 2024.

The think tank expects higher interest rates and inflation to weigh on housing investment as well as on spending for households without big savings buffers.

‘Continued strong working-age population growth and higher exports as foreign student arrivals further recover will partly offset these headwinds,’ the report says.

Inflation has already been moderating and the OECD expects it to return to the Reserve Bank of Australia’s two-three target band by early 2025, a little earlier than the central bank’s own late-2025 forecast.

‘More persistent inflationary pressures or a sharper slowdown in China than expected pose downside risks to GDP growth,’ the OECD warns.

The organisation also revisited its suggestions for improving the nation’s finances as it manages an ageing population and a climate transition, as outlined in a survey last month.

Both spending savings were suggested, such as more patient care in primary care settings and preventive health policies, as well as tax reform.

Squeezing more out of the goods and services tax and further limiting concessions on superannuation were highlighted as suitable revenue raising options.

The role of immigration in the labour market was also mentioned, with Australia urged to consider making its skilled migrant intake more responsive to the changing needs of industry.

Treasurer Jim Chalmers said Australia was facing challenging global circumstances from a position of strength, with a resilient labour market and good prices for its exports.

‘The Albanese government’s economic agenda aligns with key OECD recommendations for advanced economies, including investing in our people and their skills, broadening and deepening our industrial base, and embracing the opportunities of the net zero transformation and digitalisation,’ he said.

The report also says the federal government’s budget policy will have a ‘slightly contractionary influence on economic growth’ during the next two years.