For much of its existence, Australia’s economy has been a story of bountiful resources and fortunate circumstances. From its origins as a penal colony, it has evolved into a highly developed, services-driven economy that has enjoyed one of the longest periods of uninterrupted growth in the developed world. However, as the 21st century progresses, the ‘Lucky Country’ faces a new set of challenges that will test its resilience and adaptability in a rapidly changing global landscape.
The History of Australia’s Economy
From Penal Colony to Pastoral Power: The Early Years
The British settlement of Australia in 1788 was not initially driven by grand economic ambitions. Established as a penal colony, its early years were a struggle for survival. The so-called ‘bridgehead economy’ was heavily reliant on government provisions and its limited agricultural output. The transition to a more self-sustaining economy began in the 1820s with the rise of the wool industry. The country’s vast tracts of land were well-suited to sheep grazing, and Australian wool quickly became a key commodity for the textile mills of industrializing Britain. This pastoral expansion, financed largely by British capital, fueled population growth and the development of key infrastructure.
The Gold Rushes of the 19th Century
The discovery of gold in New South Wales and Victoria in 1851 was a pivotal moment in Australia’s economic history. It triggered a massive influx of migrants, tripling the population in two decades and creating huge demand for goods and services. This spurred the growth of manufacturing and service industries to support the booming mining towns. The wealth generated from gold exports was immense, with Victoria alone accounting for over a third of the world’s gold production in the 1850s. The gold rushes not only transformed the economic landscape but also had a profound social and political impact, fostering a spirit of egalitarianism and leading to democratic reforms.
Federation and the Rise of “Australian Settlement”
The Federation of the Australian colonies in 1901 marked the beginning of a new national economic identity. The early 20th century was characterized by what has been termed the “Australian Settlement”, a set of policies built around high tariffs to protect local industries, a centralized wage-fixing system to ensure fair wages, and a restrictive immigration policy. This inward-looking model aimed to build a self-reliant and equitable society while growing the domestic manufacturing sector.
The Post-War Boom
Following the Second World War, Australia entered a period of sustained economic prosperity known as the “long boom”. Wartime industrialization had laid the groundwork for a significant expansion of the manufacturing sector. This was coupled with a massive post-war immigration program that provided a much-needed labor force boost, expanding the domestic market. High commodity prices for Australia’s agricultural and mineral exports further fueled this growth. During this period, living standards rose dramatically, and the country enjoyed low unemployment and relatively low inflation.
The Turbulent 70s and 80s: Stagflation and Reform
The “long boom” came to an end in the 1970s with the onset of “stagflation”—a toxic mix of high inflation and high unemployment. The oil price shocks of the 1970s exposed the vulnerabilities of Australia’s protected economy. The subsequent decade was a period of significant economic upheaval and reform. The Hawke-Keating Labor government, in place from 1983 to 1996, embarked on a series of transformative economic reforms. These included floating the Australian dollar, deregulating the financial system, reducing tariffs and moving from a centralized wage-fixing system to enterprise bargaining. These reforms were designed to make the Australian economy more flexible, competitive and open to the global market.
Factors Driving Australia’s Economic Growth and Development in Recent Decades
The Mining Super-Cycle
The early 21st century was dominated by a massive mining boom, driven by the rapid industrialization and urbanization of China. The soaring demand for Australian iron ore and coal led to a dramatic increase in the terms of trade—the ratio of export prices to import prices. This delivered a substantial boost to national income, while spurring significant investment in mining infrastructure and creating jobs in related sectors.
A Resilient and Diversified Economy
While the mining sector has been a key driver of growth, the Australian economy is now predominantly services-based. The service sector accounts for around three-fifths of Australian GDP and employs the vast majority of the workforce. This diversification has made the economy more resilient to downturns in the commodity cycle. Financial services, education, tourism and healthcare are all significant contributors to the economy.
Prudent Macroeconomic Management
Australia’s long period of economic growth has also been underpinned by sound macroeconomic management. The adoption of an inflation-targeting framework by the Reserve Bank of Australia in the early 1990s helped to anchor inflation expectations and keep Australian inflation low, thus creating a stable economic environment. Successive governments have also been committed to fiscal discipline, which has provided a solid foundation for sustainable growth.
Current Economic Challenges in Australia
Despite its long run of success, the Australian economy faces a number of significant challenges as of the mid-2020s.
1) Slowing Productivity Growth
The 20-year rolling average of labor productivity growth halved from 1.9% per annum at the start of this century to just 0.9% in 2022–2023—the latest period of data. This decline has been attributed to a range of factors, including the shift to a service-based economy, where productivity gains are harder to achieve; a lack of business investment in new technologies and processes; and a large influx of young, less-experienced and less-educated people joining the labor market. Relative to the U.S.—where labor productivity has surged recently—mining, arts and recreation, retail and wholesale, IT and finance are sectors that have seen productivity lag behind particularly sharply.
2) The Housing Affordability Crisis
Australia is in the grip of a severe housing crisis. A chronic shortage of new homes, coupled with strong population growth, has led to soaring house prices and rents. It now takes over a decade to save for a home deposit in some cities, and households with new mortgages are spending around half their income on housing costs. The construction industry is facing significant headwinds, including labor and material shortages, which are hampering the delivery of new housing supply.
3) The Economic Impact of Climate Change
Australia is highly exposed to the economic fallout from climate change. More frequent and intense extreme weather events, such as bushfires, floods and droughts, are already having a significant impact on agriculture, infrastructure and the property market. It is estimated that climate change and extreme weather could reduce the value of the Australian property market by hundreds of billions of dollars by 2030. The transition to a low-carbon economy also presents a challenge to Australia’s resource-rich economy—in particular, demand for key fossil fuel commodities such as coal and oil should peak this decade.
4) Reliance on China
China currently absorbs over a third of Australia’s goods exports, which presents a risk in an era of growing geopolitical uncertainty—particularly due to Australia’s political closeness to the U.S. and Beijing’s willingness to weaponize trade. For instance, in recent years China has banned Australian coal exports and put high tariffs on some Australian agricultural goods due to a political spat with the prior Liberal-National coalition government.
Regional Economic Perspectives within Australia
Western Australia
Western Australia’s economy has been a standout performer in recent decades, largely due to its dominant mining sector. The state is a global leader in the export of iron ore, natural gas, gold and lithium, with major markets in Asia. Perth, the capital, supports a strong services sector, including finance, education and technology. Agriculture also plays a role, especially in wheat, wool and livestock production. Its output per capita is significantly higher than the national average, highlighting the outsized contribution of its resources industry to the national economy.
Queensland
Queensland’s economy is diverse and resource-rich, with key sectors including mining, agriculture, tourism and construction. The state is a major exporter of coal, natural gas and minerals, which drive much of its international trade. Agriculture is strong in beef, sugar and tropical fruits, supported by vast rural areas. Tourism is vital, especially in regions like the Gold Coast, the Great Barrier Reef and the tropical north. Brisbane, the capital, serves as an economic hub with growing sectors in education, health and technology.
New South Wales and Victoria
New South Wales (NSW) and Victoria are the two largest state economies—though not the wealthiest in per capita terms. NSW, with Sydney as its capital, thrives on finance, technology, professional services and construction. It is Australia’s financial hub, home to major banks and the stock exchange. Victoria, centered around Melbourne, is strong in manufacturing, education, healthcare and creative industries. While the states’ economic growth has been more subdued than the resource-rich areas of the country in recent decades, they remain the major centers of population and economic activity.
South Australia
South Australia’s economy is diverse, with strong contributions from agriculture, mining, manufacturing and renewable energy. The state is a major producer of wine, wheat and seafood, benefiting from fertile land and access to global markets. Adelaide, the capital, is a growing hub for defense technology, space research and health sciences. South Australia has also made significant investments in clean energy such as wind and solar power.
The Northern Territory
The Northern Territory’s economy is heavily driven by natural resources, with mining and energy production—particularly natural gas and minerals like manganese—playing a central role. Agriculture, including cattle grazing, is another key sector, supported by vast land areas. The territory also benefits from defense spending and public sector employment. Tourism contributes significantly, with attractions like Kakadu National Park and Uluru drawing visitors. Economic activity is centered in Darwin, the capital, which serves as a strategic gateway to Asia.
Tasmania
Tasmania’s economy has undergone a significant turnaround in recent decades, driven by a booming tourism sector and a growing reputation for high-quality food and beverages. The state has also seen strong growth in retail trade and has one of the strongest job markets in the country. However, it remains the poorest part of Australia in per-capita terms.
Conclusion: The Future of Australia’s Economy
Our panelists anticipate that Australia’s GDP growth will remain above 2% over the coming decade, elevated by rich world standards. However, this will be in significant part due to rapid population growth in excess of 1% a year; the rise in GDP per capita will thus be far less impressive.
To substantially boost individual living standards, Australia needs to address its flagging productivity growth, tackle the housing affordability crisis and manage the economic transition to a low-carbon future. Diversifying trade relationships and moving up the value chain from simply exporting raw materials will also be crucial.
The country should in theory be well positioned to tackle these challenges; it boasts a highly skilled workforce, strong institutions, abundant land and energy resources plus a low public debt and a strong fiscal position—the latter providing space for growth-enhancing investment. The “Lucky Country” can no longer rely on luck alone; its future success will depend on its capacity for innovation and reform.