Publications - Mid-Year Economic and Fiscal Outlook: Domestic Economic Outlook

Outlook for 1999-2000Economic Growth

Despite some continuing adverse fallout from the Asian crisis, economic growth in Australia is expected to remain very solid in 1999-2000 at around 3½ per cent, up from the 3 per cent growth forecast at Budget. Growth of 3½ per cent compares very favourably with expected growth rates in most developed economies and follows the very robust growth of around 4½ per cent in both 1997-98 and 1998-99.

The upward revision to the growth forecast since Budget reflects an improving world outlook, together with continuing strength in domestic demand, particularly household consumption, and a firmer labour market than had been anticipated.

Employment

Employment is forecast to grow by 2¼ per cent in 1999-2000 in year-average terms, up from 1¾ per cent at Budget and broadly unchanged from 1998-99. The upward revision to forecast growth in employment in 1999-2000 reflects the stronger outlook for overall economic activity than was factored in at Budget, and is consistent with a range of supportive partial indicators such as job vacancy series and business surveys of employment intentions.

The unemployment rate is expected to continue its recent downward trend, averaging around 7 per cent over 1999-2000 as a whole, falling to 6¾ per cent by the June quarter 2000. This forecast is below that at Budget, reflecting the improvement in the outlook for activity and the recent strength of the labour market.

Inflation

Inflation is expected to rise a little from recent very low levels, to average 2¼ per cent in 1999-2000. This modest increase in inflation reflects expected slightly faster growth in nominal unit labour costs in Australia as well as some reversal of the international deflationary forces which were evident during the economic downturn in Asia in 1997 and 1998.

The Current Account Deficit

Australia’s current account deficit (CAD) is expected to remain around 5½ per cent of GDP in 1999-2000, with a declining trend through the year. Quarterly outcomes, however, are likely to remain quite volatile, and therefore subject to the usual uncertainties.

Export volume growth is forecast to be around 5 per cent, compared with around 2 per cent in 1998-99, as world growth strengthens. Import volumes in 1999-2000 are also expected to increase by around 5 per cent, slightly more than was anticipated at Budget, with the upward revision reflecting both the increase in forecast domestic demand since Budget and a downward revision to expected import prices.

Outlook For 2000-01

Economic Growth

Growth in 2000-01 is expected to be a strong 3¾ per cent in year-average terms, with employment growth remaining firm at around 2 per cent, raising the prospect of further declines in unemployment. Domestic demand growth is expected to ease, with the impact on activity more than offset by stronger growth in net exports. The CAD is expected to fall as a percentage of GDP in 2000-01, reflecting stronger world growth and increased export revenues from the olympics.

Prices

Leaving aside the direct effects of the Government’s tax package on consumer prices, inflation is estimated to be around 2½ per cent in year-average and through-the-year terms in 2000-01, up marginally from around 2¼ per cent in year-average terms in 1999-2000.

The changes to indirect tax arrangements are estimated to increase the CPI by around 2¾ per cent through the year to the June quarter 2001. With ongoing inflation of around 2½ per cent, the CPI is expected to increase by around 5¼ per cent through the year to the June quarter 2001. In year-average terms, the CPI is expected to increase by around 5½ per cent.

The longer-term impact of the Government’s tax package on the CPI will be appreciably less than the impact in 2000-01. Additional tax package measures will be introduced in 2001, 2002 and 2005 which will further reduce the overall CPI impact of the package to around 2¼ per cent over the longer run (or around 1¾ per cent excluding tobacco). These measures include the removal of Financial Institutions Duties (FID) and Bank Account Debit (BAD) taxes and the phasing-in of input tax credits for motor vehicles.