Australia has been warned that a further escalation in its tensions with China could undermine its economic growth outlook.
In its latest Economic Outlook, the Organisation for Economic Cooperation and Development (OECD) urges Australia not to withdraw its fiscal and monetary policy support until the economic recovery is “well-entrenched”.
It expects the unwinding of strong fiscal support will be a headwind for economic growth in the second half of 2021 and the gradual phasing out of job retention programs – such as JobKeeper – will cause the unemployment rate to rise further.
However, the easing of Victoria’s lockdown and strong fiscal support will boost economic growth in the near term.
“The infrastructure-led economic recovery in China will help sustain commodity exports and mining investment,” the OECD said, releasing the outlook on Tuesday.
“(But) any additional escalation in geopolitical tensions with China may undermine export growth.”
The Paris-based institution forecasts the Australian economy will contract by 3.8 per cent in 2020, before growing by 3.2 per cent and 3.1 per cent in 2021 and 2022 respectively.
However, it predicts the unemployment rate to rise to 7.9 per cent in 2021 compared with 6.8 per cent this year, and still be at 7.4 per cent in 2022.
“A key risk to the outlook is a fall in business and consumer confidence, as reduced government support is accompanied by a rise in business liquidations and unemployment,” the OECD said.
“On the upside, a faster-than-expected phasing out of border restrictions would boost the recovery in services exports.”
On policy, it backs the replacing of taxes and fees on property transactions, such as stamp duty, with a recurrent land tax which is being contemplated by several Australian states.
It believes this would achieve a “more growth-friendly tax mix and promote labour mobility”.
It also urges Australian authorities to permanently strengthen the social safety net and support increased investment in social housing.