Consistent with the Budget forecasts, solid growth is expected in the Australian economy in 2010-11 and 2011-12, although the GDP forecasts have been revised down slightly.
Currently there are only tentative signs that a self-sustaining private sector recovery is underway, with growth in consumption, dwelling and business investment expected to be more subdued in the short term than at Budget. Confidence has declined, reflecting concerns around the global outlook and financial market volatility. Looking further ahead, consumption is expected to grow solidly, while business investment and exports are expected to contribute significantly to GDP growth – driven in large part by ongoing strong demand for Australian commodities.
The terms of trade are expected to be higher in the short term than forecast at Budget, but to fall more sharply in 2011-12 reflecting expectations of increased global supply of key commodities. Nominal GDP has been revised accordingly, and is now expected to increase by a stronger 9¼ per cent in 2010-11 but a weaker 4¾ per cent in 2011-12. As such, nominal GDP is expected to be around $2 billion lower in 2011-12 compared to Budget.
While there are greater risks to the global recovery, the outlook for global growth has continued to improve – notwithstanding the weaker outlook for Europe. Strong growth in our Asian trading partners has underpinned an upgrade of ¼ of a percentage point to forecast world growth in 2010. However, our forecast for global growth in 2011 has been downgraded by ¼ of a percentage point, reflecting recently announced fiscal consolidation plans in major European economies and the transmission of recent financial market shocks to activity and confidence.
Australian real GDP is expected to grow by 2¼ per cent in 2009-10. This is marginally higher than the forecast of 2 per cent growth in the 2010-11 Budget, reflecting ABS revisions to historical outcomes. However, the growth forecast for 2010-11 has been reduced to 3 per cent (from 3¼ per cent at Budget) due to expected short term weakness in consumption and dwelling investment. Further, GDP is now expected to grow by 3¾ per cent in 2011-12, compared with growth of 4 per cent at Budget.
Table 1: Key Domestic Forecasts – June compared with Budget
|Real GDP (b)||1.3||2||2 1/4||3 1/4||3||4||3 3/4|
|Nominal GDP (b)||6.3||2 3/4||3 1/4||8 1/2||9 1/4||5 3/4||4 3/4|
|Employment (b)||1.1||1 1/4||1 1/4||2 1/2||2 3/4||2||2|
|Unemployment rate (c)||5.7||5 1/4||5 1/4||5||5||4 3/4||4 3/4|
|CPI (d)||1.5||3 1/4||3 1/4||2 1/2||2 3/4||2 1/2||2 3/4|
|Underlying inflation (d)||3.9||3||3||2 1/2||2 3/4||2 1/2||2 3/4|
|WPI (b)||4.0||3||3 1/4||3 1/4||3 3/4||4||4|
|Terms of trade (b)||8.4||-3 3/4||-3||14 1/4||16||-3 3/4||-6 1/2|
(a) Calculated original data.
(b) Year average.
(c) June quarter.
(d) Through-the-year growth rate to the June quarter.
The labour market is expected to continue to perform strongly over the forecast period, despite a slightly weaker outlook for economic activity. Employment is expected to grow at above-trend rates over the forecast period, resulting in the unemployment rate trending downwards to 4¾ per cent in late 2011-12 – in line with the Budget forecasts. Average hours worked are expected to rebound from recent lows and approach trend levels in 2011-12.
The persistence of recent inflation outcomes, driven by strength in administered prices, has resulted in a stronger forecast for inflation compared with Budget – although inflation is still forecast to be within the RBA's target band in 2010-11 and 2011-12. Despite an easing in market prices, rising utility prices are expected to continue to place upward pressure on the CPI.
After some weakness in consumption in the short term due to lower confidence, consumption is expected to grow solidly over the rest of the forecast period due to higher incomes associated with a strong labour market and higher commodity prices. Dwelling investment growth is also expected to be reasonably strong in the medium term, given house price growth, population growth and pent-up demand.
Demand for Australia's non-rural commodities has remained strong, driving further increases in the prices of Australia's main commodities of iron ore and coal. As such, the terms of trade are forecast to increase by 16 per cent in 2010-11 – to reach their highest level since the Korean wool boom of the 1950s. The terms of trade are expected to decline by 6½ per cent in 2011-12, as expected increases in the world supply of iron ore and coal places downward pressure on prices. As a result, the terms of trade are expected to be around 1½ per cent lower in 2011-12 than at Budget.
The outlook for new business investment in 2010-11 and 2011-12 remains in line with Budget forecasts. Mining businesses in particular are expected to undertake significant spending on expansionary projects in order to satisfy future demand for Australian commodities. Despite a number of announcements by the mining industry since Budget, none of the major projects factored into our forecasts have been cancelled or substantially delayed.
The Government's stimulus measures are now detracting from growth, and will continue to do so over the forecast period as infrastructure spending winds down. Furthermore, high levels of state and territory spending are also set to be scaled back from 2010-11. As a result, growth in public final demand is expected to be subdued in 2010-11, while public final demand is expected to decline slightly in 2011-12.
The current account deficit (CAD) is forecast to contract to 3¼ per cent of GDP in 2010-11, more of a narrowing than at Budget due to the stronger forecast for non-rural commodity export values. The CAD is then expected to widen to 4¾ per cent of GDP as non-rural incomes decline in line with the terms of trade.
Table 2: Domestic Economy Forecasts(a)
|Year average||Through the year|
|2008-09||2009-10||2010-11||2011-12||June 2010||June 2011||June 2012|
|Panel A - Demand and output(c)|
|Household consumption||0.9||2 1/2||3||3 3/4||2 1/2||3 1/4||3 3/4|
|Dwellings||-1.9||1||5 1/2||5 1/2||7 1/2||10||2 1/2|
|Total business investment(d)||6.6||-3||7 1/2||12 1/2||-2 1/2||14||12|
|Non-dwelling construction(d)||8.5||-8||7 1/2||14||-8||15 1/2||12 1/2|
|Machinery and equipment(d)||4.7||-2||7||13 1/2||-1||14 1/2||12 1/2|
|Private final demand(d)||1.5||1 1/4||4||5 3/4||1 1/2||6||5 1/2|
|Public final demand(d)||4.3||9||1 3/4||-1 3/4||11 1/2||-1 3/4||-1 3/4|
|Total final demand||2.1||3||3 1/2||4||3 3/4||4 1/4||3 3/4|
|Change in inventories(e)|
|Private non-farm||-0.7||1/4||1/2||0||1 1/4||1/4||0|
|Farm and public authorities(f)||-0.2||1/4||0||0||0||0||0|
|Gross national expenditure||1.2||3 3/4||3 3/4||4||5||4 1/4||3 3/4|
|Exports of goods and services||1.1||2||4 1/2||6||2||4 1/2||7|
|Imports of goods and services||-2.9||6||8 1/2||8||16 1/2||7||7 1/2|
|Net exports(e)||0.8||- 3/4||-1||- 1/2||-2 3/4||- 3/4||- 1/2|
|Gross domestic product||1.3||2 1/4||3||3 3/4||2 1/4||3 3/4||3 1/2|
|Non-farm product||0.9||2 1/4||3 1/4||3 3/4||2 1/4||3 3/4||3 1/2|
|Nominal gross domestic product||6.3||3 1/4||9 1/4||4 3/4||8 3/4||7||5|
|Panel B - Other selected economic measures|
|Terms of trade||8.4||-3||16||-6 1/2||19||3 1/2||-6 1/4|
|Current account balance|
|Percentage of GDP(g)||-3.0||-4 3/4||-3 1/4||-4 3/4||-3 1/4||-3 3/4||-5|
|Employment (labour force survey basis)||1.1||1 1/4||2 3/4||2||2 3/4||2 1/4||2|
|Unemployment rate (per cent)(g)||5.0||5 1/2||5||5||5 1/4||5||4 3/4|
|Participation rate (per cent)(g)||65.4||65 1/4||65 1/4||65 1/2||65 1/4||65 1/2||65 1/2|
|Prices and wages|
|Consumer Price Index(h)|
|- headline||3.1||2 1/2||3||2 3/4||3 1/4||2 3/4||2 3/4|
|- underlying||4.3||3 1/4||2 3/4||2 3/4||3||2 3/4||2 3/4|
|Gross non-farm product deflator||5.3||1 1/4||6||1||6 3/4||3||1 1/4|
|Wage Price Index||4.0||3 1/4||3 3/4||4||3||3 3/4||4|
(a) Percentage change on preceding year unless otherwise indicated.
(b) Calculated using original data.
(c) Chain volume measure, except for nominal GDP.
(d) Excluding second-hand asset sales from the public sector to the private sector.
(e) Percentage point contribution to growth in GDP.
(f) For presentation purposes, changes in inventories held by privatised marketing authorities are included with the inventories of the farm sector and public marketing authorities.
(g) The estimates in the final three columns are the forecast rates in the June quarter in 2010, 2011 & 2012 respectively.
Source: ABS Cat. No. 5206.0, 5302.0, 6202.0, 6345.0, 6401.0, unpublished ABS data and Treasury.