| Year | Australia Capacity Utilisation (%) | Chile Capacity Utilisation (%) | Norway Capacity Utilisation (%) |
|---|---|---|---|
| 2018 | 80.2 | 78.5 | 81.0 |
| 2019 | 79.8 | 77.1 | 80.4 |
| 2020 | 74.5 | 71.2 | 75.1 |
| 2021 | 81.5 | 79.9 | 82.6 |
| 2022 | 84.8 | 83.4 | 85.3 |
| 2023 | 86.1 | 85.2 | 86.7 |
Over the last two years, strong global demand for commodities and advanced manufacturing has led to a significant increase in capacity utilisation across several resource-rich and industrial economies, including Australia and Norway. Industrial plants reached near-maximum operating capacity in 2023, driven by a surge in green technology investments and infrastructure spending.
In Australia, critical sectors such as metallurgy, specialized engineering, and commercial construction have encountered severe bottlenecks. Some industrial firms have been forced to defer orders due to a lack of specialized plant machinery and raw inputs, while mining firms have struggled to secure skilled engineers. This high level of capacity utilisation has begun to feed into production costs and wages, with average weekly earnings in industrial sectors rising by 6.2%, significantly above the long-term average.
Businesses across these key sectors have reported operating near maximum operational capacity, indicating that the negative output gap has been entirely eliminated. This sharp reduction in economic slack has raised concerns among members of central bank monetary policy committees.
To counteract escalating inflationary pressures, central banks have aggressively tightened monetary policy. For instance, the Reserve Bank of Australia raised its cash rate from a historic low of 0.1% to 4.35% by late 2023. This monetary tightening is designed to cool aggregate demand, ease capacity constraints, and anchor inflation expectations.
However, relying solely on demand-side policies to control inflation may create long-term costs. Many economists argue that sustainable, non-inflationary growth is only achievable through supply-side enhancements, such as targeted capital investment tax credits, infrastructure projects to de-bottleneck ports, and technical retraining schemes. External factors also complicate the inflation path; global supply-chain disruptions, geopolitical tensions affecting energy prices, and fluctuations in the Australian dollar exchange rate (which experienced significant volatility in 2023) continue to impact the prices of imported intermediate inputs, making the path back to target inflation highly uncertain.
Extract B states: 'Businesses across these key sectors have reported operating near maximum operational capacity, indicating that the negative output gap has been entirely eliminated.'
Explain how a sustained increase in capacity utilisation in an economy is likely to affect inflation.
