Statement 3: Economic Outlook
Contents
Part I: Overview 3-3
Part II: The outlook for the international economy 3-7
Part III: The outlook for the domestic economy 3-11
Key assumptions 3-11
Demand and output 3-11
Household consumption 3-13
Dwelling investment 3-15
Business investment 3-17
Inventories 3-21
Public final demand 3-21
Net exports and the current account deficit 3-21
Net exports 3-22
The terms of trade 3-25
The current account deficit 3-27
Labour Market, Wages and Prices 3-28
Labour market 3-28
Wages 3-31
Prices 3-32
Part IV: Uncertainties 3-33
Statement 3: Economic Outlook
Australia is well positioned to be one of the world's top performing economies in 2002-03. Economic growth is expected to remain robust, driven by strong growth in business investment. Employment growth is forecast to strengthen, with the unemployment rate to decline to around 6 per cent by mid-2003. Inflation is expected to remain within the target band, with the current account deficit to remain moderate by historical standards. World growth is set to recover through 2002 and 2003, following the sharp slowdown in 2001.
Part I: Overview
In 2001-02, economic growth in Australia is forecast to be around 3¾ per cent in year-average terms, an upward revision to the 3 per cent growth forecast contained in the Mid-Year Economic and Fiscal Outlook 2001-02. In 2002-03, growth is forecast to again be 3¾ per cent in year-average terms and a strong 4 per cent through the year to the June quarter 2003. Business investment is expected to contribute strongly to growth in 2002-03 and, combined with robust growth in household consumption, should more than offset the impact of moderating dwelling investment. Domestic demand is expected to grow strongly and more rapidly than overall economic growth, with the difference reflecting a declining net export performance. Rapid growth in imports, reflecting strong plant and equipment investment, should outweigh a rebound in export growth in line with the recovery in world growth. The current account deficit (CAD) as a percentage of GDP is expected to widen but to remain moderate and be well below earlier peaks. Inflation is forecast to remain within the target band, while solid employment growth is expected to see the unemployment rate continue to decline over the coming year.
The Australian economy strengthened as 2001 progressed, in sharp contrast to the weakening seen in most of the rest of the world. Productivity growth in Australia was strong as GDP grew by 4.1 per cent through the year to the December quarter 2001 and employment growth was subdued. Both business and consumer confidence rebounded in the latter part of the year following the initial impact on confidence of the terrorist attacks of 11 September 2001, and business investment and household consumption grew solidly over the second half of 2001. Dwelling construction grew strongly through 2001, driven by historically low interest rates and the Government's enhanced First Home Owners Scheme (FHOS).
The outlook for world growth has improved since the start of 2002 with the international downturn bottoming and a moderate recovery now underway, underpinned by a recovery in the United States (US) and a modest pick up in Europe. While significant uncertainties remain, the sharp downside risks surrounding the outlook for the US following the events of 11 September 2001 appear to have diminished. The recovery in the US will, in turn, assist the recovery of the non-Japan East Asian countries. The Japanese economy, however, remains weak and fragile and is likely to continue to underperform even as the rest of the world recovers. Overall, following growth of 2.5 per cent in 2001, world growth is expected to be around 2¾ per cent in 2002, rising to around 4 per cent in 2003. Australia's major trading partner growth is expected to be around 2¼ per cent in 2002 (mainly reflecting the weakness in Japan), rising to around 3¾ per cent in 2003.
Export growth is expected to rebound by a solid 6 per cent in 2002-03, underpinned by the recovery in world growth and increased commodity production. Import growth is expected to be above average at 11 per cent, driven by strong growth in the import-intensive sectors of the economy, particularly plant and equipment investment.
Net exports are expected to subtract around 1 percentage point from overall GDP growth in 2002-03, reflecting the strength of import growth. In turn, the current account deficit is expected to increase moderately to around 4 per cent of GDP. However, at these levels, the CAD would remain well below earlier peaks of around 6 per cent of GDP.
The business investment outlook has improved substantially, with strong business confidence starting to flow through to actual business investment. Initial data point to very strong investment intentions for 2002-03, particularly in the mining and transportation sectors. The outlook for investment in both plant and equipment and non-dwelling building and structures is for strong growth.
Forward indicators suggest that new dwelling construction has peaked and activity is expected to decline in 2002-03. However, alterations and additions should continue to grow, partly offsetting the forecast decline in new dwelling construction. Overall dwelling investment is forecast to decline by around 3 per cent in 2002-03.
The outlook for household consumption expenditure appears to be quite strong. Consumer confidence is at relatively high levels, assisted by strong wealth accumulation (particularly in housing), with low interest rates and better labour market conditions supporting disposable income.
The inflation outlook remains in check, with the CPI forecast to increase by around 2¾ per cent in 2002-03, and around 2½ per cent through the year to the June quarter 2003, the mid-point of the medium-term target band. Despite some temporary upward price pressures expected in the first half of 2002, subdued unit labour costs, reflecting moderate wage increases and strong productivity growth, point to inflation moderating over the forecast period.
Employment growth is expected to be a robust 1¾ per cent in 2002-03, largely reflecting the robust economic growth outlook, continued moderate wages growth and relatively strong business and consumer confidence. In turn, the unemployment rate is expected to decline to average around 6 per cent in the June quarter 2003.
The uncertainties surrounding both the international and domestic economic outlook have generally declined since late 2001 and seem to be relatively evenly balanced. Nevertheless, the recent increase in the oil price (which is being driven mainly by concerns about conflict in the Middle East), if sustained above the assumed price of $US23 per barrel underlying the forecasts, could adversely affect confidence both domestically and internationally. Higher oil prices could reduce discretionary expenditures to below that forecast and higher petrol prices could also feed into ongoing inflation.
In addition to higher petrol prices, there are a number of other short-term price pressures evident in the period ahead, including higher insurance premiums. While these short-term price pressures are not expected to become a source of ongoing inflation, they represent some risk in relation to the outlook.
There is also some uncertainty surrounding the downturn in the dwelling sector, with the phasing out of the enhanced FHOS. The forecasts incorporate ongoing growth in alterations and additions, with a decline in new dwelling construction. If alterations and additions were also to significantly decline, then dwelling investment would fall by significantly more than currently forecast, detracting from the rate of employment growth and household consumption.
Table 1: Domestic economy forecasts(a)
(a) Percentage change on previous year unless otherwise indicated.
(b) Calculated using original data.
(c) Chain volume measure.
(d) Excluding transfers of second-hand asset sales from the public sector to the private sector.
(e) Percentage point contribution to growth in GDP.
(f) Calculated at basic prices.
(g) The estimate in the final column represents the forecast level in the June quarter 2003.
(h) Average non-farm compensation of employees (national accounts basis).
Source: Australian Bureau of Statistics (ABS) Cat. No. 5206.0, 5302.0, 6202.0, 6401.0, unpublished ABS data and Treasury.
