Australia's economy is underachieving, according to this key measure from the IMF

Marwan Naamani / AFP / Getty Images

Australia’s economy is under-performing compared to its developed markets peers, according to the International Monetary Fund.

As part of its World Economic Outlook report for October 2017, the IMF summarised how the world’s biggest economies are performing relative to their potential.

Based on that measure — known as the output gap — the figures show Australia’s economy is the worst performer among developed markets, falling short of its optimal output by almost 2% of GDP:

Source: International Monetary Fund

A negative output gap occurs when actual output is less than what an economy could produce at full capacity. It reflects spare capacity, or slack, due to weak demand.­

So while some measures such as business conditions and employment figures indicate Australia is performing well, the IMF figures suggest the broader economy is still falling well short of optimal levels.

The above chart perhaps serves as another reminder that in order for Australia to maintain its 26-year run of uninterrupted growth, improvements in productivity should be the top priority for policy makers.

Last week, ANZ economists David Plank and Jack Chambers pointed out that recent GDP growth has been boosted by rapid population growth, rather than improvements in productivity.

ANZ’s research showed that when adjusted for population growth for growth per capita, Australia’s economic picture doesn’t look nearly as rosy.

Increased productivity growth is on the radar of policymakers — last week, the Federal Government’s Productivity Commission released a five-yearly review with a list of policy options to boost productivity.

However, so far there’s been little evidence that such reports have driven tangible changes in policy, while recent data points suggest Australia is at risk of becoming less competitive in the global economic landscape.

NOW READ: Australia needs to focus on getting better, not just bigger

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