Risks to the outlook
Recent financial market developments present a significant downside risk to the world and domestic economic outlooks. Further volatility in financial markets has the potential to result in slower growth in the United States and consequently dampen world growth more broadly through trade and financial market linkages.
In the Australian economy, higher borrowing costs would weigh on dwelling and business investment, as well as household consumption. A significant slowdown in world growth would also slow the demand for Australia's exports and could result in falls in commodity prices. Significant commodity price falls would lower growth in national income and activity.
Alternatively, should the recent financial market turbulence continue to be resolved in a relatively benign fashion, stronger outcomes for the domestic economy are possible. This is especially the case given the magnitude of investment projects in the pipeline. In this event, stronger growth in an economy that is close to full employment could add to wage and price pressures, although these pressures may be offset somewhat by a higher exchange rate. The Australian dollar has appreciated significantly recently and, were this appreciation to be sustained, it would have some dampening effect on economic activity and prices.
Dry weather conditions and low water storage levels continue to pose a downside risk to farm production. While timely rains provided for a good start to the 2007 winter cropping season, a lack of follow‑up rains has adversely affected the winter crop. The forecasts take this and the current low water allocations in the Murray‑Darling Basin into account, but rely on the usual Budget assumption of average seasonal conditions for the remainder of the forecast period.