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Statement 3: Economic Outlook
Part I: Overview
Part II: The outlook for the international economy
Part III: The outlook for the domestic economy
Demand and output
Net exports and the current account balance
The labour market
Part IV: Uncertainties
Economic growth in Australia in 2001-02 is forecast to rebound quite strongly, driven by a turn around in residential construction. Employment growth is expected to be subdued with the unemployment rate averaging around 7 per cent, while inflation is forecast to decline and the current account deficit to be well below the average of the last decade. World growth is expected to weaken in 2001 to a little below historical averages, although there are significant downside risks.
In 2001-02, economic growth in Australia is forecast to be around 3¼ per cent in year-average terms and a strong 4 per cent through the year to the June quarter 2002. Residential construction is expected to contribute strongly to growth in 2001-02, with moderate growth in household consumption, business investment and net exports. Average unemployment rates are forecast to be slightly higher than recent levels, with inflation declining and the current account deficit well below its decade average.
Following three years of very strong economic growth in excess of 4 per cent per annum, the Australian economy slowed sharply in the second half of 2000. The weakness was concentrated in the residential construction sector, in part reflecting an unwinding of the bring-forward of residential construction into the first half of 2000, ahead of the introduction of The New Tax System. The downturn in this sector had flow-on effects to other parts of the economy through its impact on employment, consumer spending and consumer and business sentiment. At the same time, net exports contributed strongly to growth in 2000-01, buoyed by the lower exchange rate and the Olympics, despite a deteriorating international outlook and adverse seasonal conditions in the farm sector.
Given the weakness in the second half of 2000 and subdued growth expected in the first half of 2001, economic growth is now expected to be around 2 per cent in 2000-01 in year-average terms, and around 1 per cent in through-the-year terms.
The outlook for world growth has deteriorated since late 2000, led by a sharp slowdown in the United States (US) and weaker conditions in Japan. The outlook for growth in countries with close linkages to the US - such as the non-Japan East Asian economies - has also weakened. Europe is likely to be less affected by a slowdown in the US and is expected to continue to grow at a solid pace. Overall, the global economy is expected to grow by around 3¼ per cent in 2001, down sharply from 4.8 per cent in 2000, although only a little below the long-run historical average. Nevertheless, there are significant downside risks to growth in the US and Japan. Slower than forecast growth in these countries would result in weaker growth in East Asia and a more broadly based global slowdown.
Despite the slower world growth expected in 2001, net exports are estimated to contribute strongly to overall economic growth in Australia in 2000-01, with a further modest positive contribution expected in 2001-02. The exchange rate has helped boost the competitiveness of many of Australia's export and import competing industries. Australia's current account deficit (CAD) is forecast to be around 3 per cent of gross domestic product (GDP) in both 2000-01 and 2001-02. At these forecast levels, the CAD will be down markedly from 5.3 per cent of GDP in 1999-2000 and well below its average of the 1990s. In addition to the stronger balance of trade, the lower CAD also reflects a decline in the net income deficit (NID) in response to lower world and domestic interest rates and reduced margins between Australian and world investment returns.
Gross national expenditure is forecast to grow at a moderate rate of around 3 per cent in 2001-02, compared with less than 1 per cent in 2000-01. Residential construction is expected to grow by around 5 per cent in year-average terms in 2001-02, following a marked decline of around 25 per cent in 2000-01, with the turn around supported by recent reductions in interest rates and the Government's more generous First Home Owners Scheme. The recovery in this sector is expected to gather strength as 2001-02 proceeds, with through-the-year growth of around 14 per cent. Modest growth is also expected to resume in non-residential construction, particularly engineering construction, following several years of decline since the recent peak in 1998-99.
Household consumption expenditure is forecast to increase by around 3 per cent in 2001-02, a little faster than in 2000-01 but well below the very rapid growth experienced in the latter part of the 1990s (which was buoyed by strong growth in asset prices and household wealth). Household consumption will be supported by lower interest rates and a forecast gradual easing in petrol prices.
Employment growth in 2001-02 is expected to be slower than in recent years but grow at around 1 per cent in year-average terms and around 1½ per cent through the year. This largely reflects the lagged effects of slower overall economic growth in 2000-01, particularly the downturn in the labour intensive construction sector. The unemployment rate is expected to increase slightly, to average around 7 per cent in 2001-02 and in the June quarter 2002. This follows a period of declining unemployment which carried the unemployment rate down to around decade lows. Prospects are sound for a resumption in the downward trend in unemployment over the medium term as the construction sector recovers and overall economic growth strengthens.
Inflation is forecast to decline in 2001-02, with the headline consumer price index (CPI) rising by around 2 per cent in both year-average and through-the-year terms. The abolition of Financial Institutions Duty and other elements of The New Tax System will put downward pressure on consumer prices in 2001-02 and the forecasts also incorporate a slight easing in petrol prices in line with an expected downward trend in world oil prices.
From a domestic perspective, a key uncertainty relates to the possibility that the recent downward trend in business and consumer sentiment is sustained over coming quarters. This poses a downside risk to the forecasts for business investment and consumption. On the other hand, there is a possibility that the lower exchange rate and reductions in interest rates will provide a greater stimulus to economic growth than has been incorporated into the forecasts.
Table 1: Domestic economy forecasts(a)
(a) Percentage change on preceding year unless otherwise indicated.
(b) Calculated using original data.
(c) Chain volume measure.
(d) Excluding private sector net purchases of second-hand public sector assets.
(e) Percentage point contribution to growth in GDP.
(f) The estimate in the final column represents the forecast level in the June quarter 2002.
(g) The `ongoing' CPI is the headline measure abstracting from the impact of The New Tax System.