STATEMENT 2 * ECONOMIC AND FISCAL OUTLOOK

PART I: ECONOMIC OUTLOOK

Overview [1]

Economic activity is expected to strengthen in 1997-98, underpinned by supportive international conditions, low inflation, the impact of the three reductions in official interest rates in the last year and the structurally sound position of both the household and corporate sectors. Employment is forecast to grow solidly and the unemployment rate should commence falling again. Inflation is expected to remain low. Despite the strengthening in activity, the current account deficit should increase only slightly as a share of GDP as higher national saving largely accommodates an increase in national investment.

The strengthening in prospect follows an easing in the pace of expansion in 1996-97, the sixth year of the current economic upswing. Such periodic easings are a characteristic of prolonged expansion periods. The slowing in the pace of growth in 1996-97 resulted in subdued employment growth and little change in the trend unemployment rate.

The expected acceleration in 1997-98 should reflect stronger private demand combined with continued modest growth in public demand and a smaller detraction from growth by net exports. Private consumption growth is forecast to accelerate in line with stronger household income. This strengthening in household income reflects stronger growth in non-wage income supported by ongoing strong growth in wages, salaries and supplements. The recovery now evident in the housing sector should strengthen as the excess supply of dwellings is further eroded and housing affordability stays high. The pace of business investment should again be strong, supported by another year of rapid non-residential construction growth.

Stronger economic growth should lead to a strengthening in employment growth and a reduction in the unemployment rate. While the unemployment rate has been little changed over the past two years, it is expected to fall to around 8 per cent by the end of 1997-98.

Underlying inflation should remain towards the bottom of the Reserve Bank's medium-term monetary policy target range during 1997-98. Labour costs should be kept in check as growth in wages and labour productivity remain little changed through 1997-98, while competitive pressures, including the lagged effects of recent increases in the exchange rate, should continue to put downward pressure on inflation.

The current account deficit is expected to increase slightly as a share of GDP in 1997-98. National saving is expected to rise to its highest level (as a share of GDP) since 1989-90, largely accommodating a rise in national investment as activity strengthens.

Table 1: Budget Forecasts^(a)

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

(b) Calculated using annual original data.

(d) Average 1989-90 prices.

(e) Percentage point contribution to growth in GDP (Average measure).

(f) Average earnings (national accounts basis). Forecast earnings growth excluding the expected impact of above average Commonwealth Government redundancies is 4½ per cent in 1996-97 and 4 per cent in 1997-98. The nominal unit labour cost estimate for 1996-97 is similarly affected.

(g) The estimate in the final column represents the forecast level in the June quarter 1998