Document Index Budget Paper 1 Budget Statement 2

Part IV: Uncertainties Surrounding the Outlook

There continues to be significant uncertainty surrounding the international economic outlook and with that the outlook for Australia’s export industries and the terms of trade. Although there are several factors pointing to an improved international economic outlook in calendar year 2000, there are questions about the sustainability of a strong East Asian recovery, and considerable uncertainty is attached to the outlook for Japan and some emerging market economies. Against this, economic growth in the United States could continue to exceed expectations.

The export outlook will, of course, be heavily dependent on the gradual recovery of the international economy and accordingly also remains subject to a high degree of uncertainty. The forecast slight decline in the CAD in 1999-2000 reflects the outlook for a gradual pick-up in growth in Australia's major export markets and a slight increase in the terms of trade. Should the world economy not pick-up as expected in 2000, then the export outlook would be more subdued and the CAD may be a little higher.

Against the backdrop of these international risks, considerable uncertainty remains about the timing and extent of the slow down in the domestic economy from the very strong growth in 1997-98 and 1998-99. Business investment, which is forecast to slow after six years of strong growth, is by nature quite volatile, with surveys of business investment intentions only providing a broad guide to likely outcomes.

Some uncertainty remains around the extent to which the recent strength in household consumption expenditure will be sustained once the effects of recent increases in household wealth have run their course. A related area of uncertainty is the apparent downward trend in the household saving ratio and rising household debt. If households move to stabilise or increase their saving rates from recent levels and to rein in the growth in household debt, household consumption expenditure could be weaker than forecast. On the other hand, broader measures of households' financial position, such as net worth and debt servicing ratios, remain sound and interest rates are at low levels, suggesting that risks around the outlook for household consumption are relatively evenly balanced.

The timing of business and dwelling investment and household consumption in the latter part of 1999-2000 will also be affected to some extent by the introduction of the GST and the abolition of the wholesale sales tax.

Some increase in spending and business stocks may occur in the December quarter 1999 in response to lingering concerns about Y2K related disruptions. However, it seems likely that such spending and stock building would be largely reversed in the March quarter 2000, with minimal effect on average growth outcomes for 1999-2000 as a whole. There remain uncertainties, however, in relation to Australia's international trade if Y2K effects disrupt some of our major trading partners.

A modest increase in the labour force participation rate from recent levels is expected over the course of 1999-2000, reflecting the continuing favourable employment outlook. Nevertheless, given recent trends, the participation rate is an important area of uncertainty surrounding the outlook for unemployment. If the participation rate were to remain around current levels then, other things being equal, the unemployment rate would continue its downward trend, despite the moderating economic growth rate.