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Statement 2: Economic Outlook

 

 

This Statement presents the economic forecasts that underlie the Budget estimates.

Overview

The Australian economy is entering its 26th consecutive year of economic growth and is forecast to strengthen over the forecast period despite continuing uncertainty internationally. As our economy transitions to broader‑based growth, near‑term economic activity will continue to be supported by household consumption, dwelling investment and exports, while falling mining investment is expected to continue to detract from growth over the forecast period.

Expectations for global growth have moderated since the 2015‑16 Mid‑Year Economic and Fiscal Outlook (MYEFO). The global economy is nevertheless forecast to grow by 3¼ per cent in 2016 and 3½ per cent in 2017 but downside risks are increasing. That said, the overall outlook for growth in Australia's major trading partners is expected to be stronger than global growth at 4 per cent in each year of the forecast period, unchanged from the 2015‑16 MYEFO.

The world economy continues to struggle to regain sustained momentum. China is expected to support near‑term growth but still has a major rebalancing task ahead. While India is expected to be the fastest growing major economy — supported by strengthening domestic demand and a growing working age population — the forecast is dependent on continued favourable conditions, including ongoing low commodity prices. The United States has recorded strong labour market performance but real GDP growth has slowed in recent quarters. Growth in the euro area is expected to remain moderate over the forward estimates, and sluggish growth is expected to continue in Japan.

The US dollar price of Tapis crude oil fell by close to 30 per cent through the year to the end of March 2016. The response to lower oil prices during 2015 has not resulted in as strong an uplift in global demand as in the past. Continuing uncertainty about the global impact of oil prices on consumption and investment presents a risk to the economic outlook over the forecast period.

Domestically, the transition to broader‑based growth is well underway, supported by historically low interest rates and a lower exchange rate. Real GDP is forecast to grow by 2½ per cent in both 2015‑16 and 2016‑17 before strengthening to 3 per cent in 2017‑18, little changed from the outlook at the 2015‑16 MYEFO.

By lowering borrowing costs for households and businesses, historically low interest rates are supporting growth. The lower exchange rate over the past year has facilitated the shift of resources to the service sectors and moderate wage growth is underpinning strong employment growth. This is expected to continue during the forecast period with the unemployment rate forecast to fall to around 5½ per cent by the June quarter of 2017.

Household consumption is forecast to grow steadily, supported by employment growth, lower petrol prices and a falling household saving rate. The outlook for dwelling investment remains positive with a solid pipeline of work yet to be done, but the rate of growth is expected to ease over the forecast period.

Similar to many advanced economies, moderate wage growth is expected to continue to keep inflation contained. Low petrol prices and competition in the retail sector are also expected to weigh on inflation.

The outlook for business investment will continue to be dominated by shrinking mining investment, which is expected to fall by 27½ per cent in 2015‑16 and 25½ per cent in 2016‑17. While this drag on growth is expected to lessen by 2017‑18, uncertainty remains as to when the transition to broader‑based sources of growth, already evident in the labour market, will translate into stronger non‑mining investment.

Australia's non‑rural commodity exports are expected to grow by 7 per cent in 2016‑17 and 7½ per cent in 2017‑18 as iron ore and LNG production continues to ramp up. The lower exchange rate over the past year and rising demand from Asia are also expected to support service exports, such as tourism and education. Tourist numbers in 2015 have increased by around 560,000 people or around 8 per cent compared with 2014.

There has been renewed strength over the past quarter in some key commodity export prices — particularly iron ore — driven in part by expectations of ongoing stimulus to meet China's GDP growth targets. Commodity prices are, however, weaker than those seen over recent years leading to lower terms of trade and there is a risk that more recent increases in commodity prices will not be sustained. Nevertheless, current prices are more representative of longer‑term averages than the extraordinary peaks experienced during the mining boom. See Statement 7: Forecasting Performance and Scenario Analysis (Statement 7) for a discussion of the impact of still lower terms of trade on the Budget estimates.

Australia is currently a net importer of oil and petroleum products and Australian households and businesses are benefiting from lower fuel prices. A sustained drop in oil prices, however, would affect the price of LNG exports going forward as they are linked to oil prices through long‑term contracts.

The moderate outlook for wages is weighing on forecasts of nominal GDP. Nominal GDP growth is expected to be 2½ per cent in 2015‑16 and 4¼ per cent in 2016‑17, before increasing to 5 per cent in 2017‑18. Forecasts of nominal GDP are also being affected by weaker forecast inflation than at the 2015‑16 MYEFO. Since the 2015‑16 MYEFO, the forecast level of nominal GDP has been revised down by $27½ billion over the four years to 2018‑19. This has contributed to a downward revision to tax receipts, excluding new policy, of $13.5 billion over the four years to 2018‑19 compared with the 2015‑16 MYEFO.

There are positive and negative risks to the forecasts for the Australian economy. A lower exchange rate than that underpinning the forecasts would generate stronger economic growth and provide further impetus to broader‑based growth. Alternatively, uncertainty around the global economic outlook could result in households becoming more cautious, leading to more saving and less consumption than expected. Growth in non‑mining business investment also remains a key source of uncertainty as the economy transitions from capital‑intensive resource investment to labour‑intensive service sectors.

Table 1: Domestic economy forecasts(a)
  Outcomes(b)   Forecasts 
  2014‑15   2015‑16 2016‑17 2017‑18
Real gross domestic product 2.2   2 1/2 2 1/2 3
Household consumption 2.7   3 3 3
Dwelling investment 7.9   8 2 1
Total business investment(c) -6.2   -11 -5 0
By industry          
Mining investment -17.3   -27 1/2 -25 1/2 -14
Non-mining investment 1.2   -2 3 1/2 4 1/2
Private final demand(c) 1.0   1/2 1 1/2 2 1/2
Public final demand(c) 0.0   2 1/4 2 1/4 2
Change in inventories(d) 0.2   0 0 0
Gross national expenditure 0.9   1 1 3/4 2 1/2
Exports of goods and services 6.5   6 5 5 1/2
Imports of goods and services 0.0   0 2 1/2 3
Net exports(d) 1.4   1 1/4 3/4 3/4
Nominal gross domestic product 1.6   2 1/2 4 1/4 5
Prices and wages          
Consumer price index(e) 1.5   1 1/4 2 2 1/4
Wage price index(f) 2.3   2 1/4 2 1/2 2 3/4
GDP deflator -0.6   0 1 3/4 1 3/4
Labour market          
Participation rate (per cent)(g) 64.8   65 65 65
Employment(f) 1.6   2 1 3/4 1 3/4
Unemployment rate (per cent)(g) 6.1   5 3/4 5 1/2 5 1/2
Balance of payments          
Terms of trade(h) -10.3   -8 3/4 1 1/4 0
Current account balance (per cent of GDP) -3.7   -4 3/4 -4 -3 1/2

(a) Percentage change on preceding year unless otherwise indicated.

(b) Calculated using original data unless otherwise indicated.

(c) Excluding second hand asset sales from the public sector to the private sector.

(d) Percentage point contribution to growth in GDP.

(e) Through the year growth rate to the June quarter.

(f) Seasonally adjusted, through the year growth rate to the June quarter.

(g) Seasonally adjusted rate for the June quarter.

(h) The forecasts are underpinned by spot prices of $55 ($US/t, FOB) for iron ore; $91 ($US/t, FOB) for metallurgical coal and $52 ($US/t, FOB) for thermal coal.

Note: The forecasts for the domestic economy are based on several technical assumptions. The exchange rate is assumed to remain around its recent average level — a trade weighted index of around 64 and a $US exchange rate of around 77 US cents. Interest rates are assumed to move broadly in line with market expectations. World oil prices (Malaysian Tapis) are assumed to remain around US$43 per barrel.

Source: ABS cat. no. 5204.0, 5206.0, 5302.0, 6202.0, 6345.0, 6401.0, unpublished ABS data and Treasury.