Statement 2: Economic Outlook
This statement presents the economic forecasts that underlie the Budget estimates.
The Australian economy is entering its 25th consecutive year of growth and is forecast to strengthen further over the next few years. This is the second longest continuous period of growth of any advanced economy in the world.
Conditions globally are expected to improve somewhat over the forecast period. Growth in Australia's major trading partners is expected to outpace world GDP growth, as activity in major advanced economies rises and growth remains strong in our faster growing Asian trading partners.
The recovery in the United States is becoming increasingly broad‑based and will provide support for world growth more broadly. Growth in China will continue to make a strong contribution to global output as authorities look to rebalance the economy towards consumption‑led drivers of growth. In India, growth has accelerated and is expected to exceed growth in all other major economies.
The lower exchange rate, lower oil and electricity prices and macroeconomic policy settings are all working together to underpin stronger growth in Australia.
Dwelling investment continues to grow strongly and household consumption grew at its fastest rate in almost three years in the December quarter 2014. Exports are also expanding rapidly as resource production ramps up and the lower exchange rate supports services sectors, such as tourism.
The outlook for growth remains positive even in the face of the adjustment underway as the resources investment boom unwinds. Mining investment is expected to fall by around 25 per cent in 2015‑16 and 30 per cent in 2016‑17. 1
Real GDP is expected to grow by 2¾ per cent in 2015‑16. This is one quarter of a percentage point slower than expected 12 months ago in the 2014‑15 Budget, as a sustained recovery in non‑mining business investment is taking longer than expected. However, stronger non‑mining business investment is expected to drive an increase in growth to 3¼ per cent in 2016‑17.
The labour market has proven more resilient than expected in recent months. Employment growth has picked up, supported by wage restraint across the economy. This has led to a downward revision to the forecast for the unemployment rate for the June quarter 2015 to 6¼ per cent. This is in the face of an improvement in the participation rate which is now expected to be 64¾ per cent in the June quarter 2015.
Going forward, the unemployment rate is expected to edge a little higher in 2015‑16 before falling in 2016‑17. The participation rate is forecast to be slightly higher than it was in the 2014‑15 Budget as improved job prospects encourage additional people back into the workforce.
Iron ore and metallurgical coal prices have fallen sharply as a substantial increase in global supply coincides with some easing in steel demand from China. The forecasts are underpinned by an iron ore price of US$48 per tonne FOB (free on board). By comparison, the spot price forecast in the 2014‑15 Budget averaged US$96 per tonne FOB, which itself was well below the peak price of US$185 per tonne FOB in 2011.
The fall in commodity prices has had a significant impact on both business profits and wages with material implications for nominal GDP.
As a result, nominal GDP is now expected to grow by 3¼ per cent in 2015‑16 before picking‑up to 5½ per cent in 2016‑17. This has driven a substantial downgrade to government taxation receipts of $52 billion since the 2014‑15 Budget (see Budget Statement 4).
Momentum in the recovery in the US, Japan and euro area and stronger growth in India will support stronger global growth. While risks have somewhat abated for the global economic outlook, risks remain, notably with China's transition to a more sustainable growth model.
In Australia, the pace and timing of the pick‑up in economic growth is subject to some uncertainty. A lower exchange rate, historically low interest rates and lower oil prices should stimulate faster growth in household spending and business investment than forecast. However, there remain some risks. The headwinds from the reduction in mining investment are significant and it is also possible that the pick‑up in non‑mining investment may not be as strong as expected. There is also a risk that momentum in consumer spending could dissipate.
|Real gross domestic product||2.5||2 1/2||2 3/4||3 1/4|
|Household consumption||2.2||2 3/4||3||3 1/4|
|Dwelling investment||5.1||6 1/2||6 1/2||4 1/2|
|Total business investment(c)||-5.1||-5 1/2||-7||-3 1/2|
|Mining investment||-7.0||-15 1/2||-25 1/2||-30 1/2|
|Non-mining investment||-3.7||2||4||7 1/2|
|Private final demand(c)||0.9||1 1/4||1 1/4||2 1/4|
|Public final demand(c)||1.6||1 1/4||1 1/2||1 1/2|
|Change in inventories(d)||-0.3||0||0||0|
|Gross national expenditure||0.7||1 1/4||1 1/2||2 1/4|
|Exports of goods and services||5.8||6 1/2||5||6 1/2|
|Imports of goods and services||-1.9||-3||-1 1/2||2 1/2|
|Net exports(d)||1.6||2||1 1/4||1|
|Nominal gross domestic product||4.0||1 1/2||3 1/4||5 1/2|
|Prices and wages|
|Consumer price index(e)||3.0||1 3/4||2 1/2||2 1/2|
|Wage price index(f)||2.5||2 1/2||2 1/2||2 3/4|
|GDP deflator||1.5||-1||1/2||2 1/4|
|Participation rate (per cent)(g)||64.6||64 3/4||64 3/4||64 3/4|
|Employment(f)||0.7||1 1/2||1 1/2||2|
|Unemployment rate (per cent)(g)||5.9||6 1/4||6 1/2||6 1/4|
|Balance of payments|
|Terms of trade(h)||-3.7||-12 1/4||-8 1/2||3/4|
|Current account balance (per cent of GDP)||-3.1||-3||-3 1/2||-2 3/4|
(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 $48 ($US/t, FOB) for iron ore; $90 ($US/t, FOB) for metallurgical coal and $60 ($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$64 per barrel.
Source: ABS cat. no. 5204.0, 5206.0, 5302.0, 6202.0, 6345.0, 6401.0, unpublished ABS data and Treasury.
1 All data are in chain volume measures and percentage change on previous year unless otherwise stated.