The outlook for the domestic economy
Demand and output
The slowing in global growth, tighter credit conditions and higher interest rates are expected to slow growth in the Australian economy. Real GDP is forecast to grow by 2¾ per cent in 2008‑09, with growth in domestic final demand slowing to 3¾ per cent and net exports subtracting 1 percentage point. The farm sector is forecast to contribute ½ of a percentage point to growth, reflecting a recovery from drought. It is expected that household consumption and business investment will be the main contributors to economic growth (Chart 2). The slowing in growth in the non‑farm economy is forecast to result in a moderation in employment growth and a gradual easing of upward pressure on wages and prices. However, price growth is expected to remain elevated over the forecast horizon.
Chart 2: Contributions to GDP growth(a)
- Adjusted for second‑hand asset sales and includes the impact of the privatisation of Telstra.
Source: ABS cat. no. 5206.0 and Treasury.
While some industries will be affected by higher interest rates and the higher exchange rate, the mining and construction sectors are expected to grow strongly given the current strength and further expected rises in non‑rural commodity prices.
Household consumption
Growth in household consumption is expected to moderate from 4½ per cent in 2007‑08 to 2¾ per cent in 2008‑09 (Chart 3). The moderation reflects the cumulative impact of rising official interest rates, which have risen by 200 basis points since March 2005, and an easing in labour market conditions. It also reflects tighter credit conditions and increased uncertainty from global financial market developments.
Chart 3: Growth in household consumption
Source: ABS cat. no. 5206.0 and Treasury.
In addition to increases in official interest rates, commercial banks have increased their average standard variable mortgage rates by around a further 40 basis points. Increased interest rates are constraining household consumption directly and, in the current environment, households are likely to reassess their financial positions and reduce debt accumulation. Cumulative interest rate rises and the uncertainty around the global environment have led consumer sentiment to weaken sharply in recent months. This is expected to weigh on consumption in the period ahead.
The current turbulence in global financial markets has also reduced growth in household wealth. Australian share prices fell by almost 10 per cent from the end of July 2007 (when the turbulence in financial markets began) to the end of April 2008. Lower returns and instability in the stock market will also increase people's desire to save for precautionary reasons, leading to a continued rise in the household saving ratio over the forecast horizon (Box 3). Growth in housing wealth is expected to slow as house price growth moderates.
Over the past 15 years, households have become much more indebted. This increases the impact of any given rise in interest rates. In the current circumstances, where interest rates have risen considerably over a long period of time, there has been an increase in the number of individuals experiencing financial stress.
Box 3: The household saving ratio Australia's household saving ratio is expected to rise in 2008‑09, continuing the recent reversal of its previous 30‑year decline since the mid‑1970s (Chart A). Chart A: Household saving ratio and
Source: ABS cat. no. 5204.0 and 5206.0. The long‑term decline in the saving ratio is largely attributable to three factors. First, financial innovation and deregulation have improved access to credit, reducing the need to save to meet large expenditures or for precautionary reasons. Second, the increasing trend towards incorporation has meant that some small business saving is now reflected in corporate saving rather than household saving. Third, substantial capital gains have allowed wealth to be built without the need to forgo current consumption. The decline in the saving ratio between 1995‑96 and 2003‑04 corresponds to a period of increasing capital gains (Chart A). Since 2003‑04 there has been some moderation in capital gains, which might have contributed to the turn‑around in the saving ratio. This turn‑around has also occurred at a time of strong growth in disposable income, largely due to the terms of trade boom. Another possible explanation for the rise in the saving ratio is that this strong income growth is perceived to be temporary, inducing households to increase saving to smooth consumption over time. Consistent with this hypothesis, consumption growth is normally less variable than income growth (Chart B). Chart B: Household consumption
Note: Data are a two‑quarter moving average and are not adjusted for the effects of The New Tax System. Source: ABS cat. no. 5206.0 and Treasury. Another possible explanation relates to the precautionary motive to save. Given high levels of indebtedness, rises in interest rates in recent years may have prompted households to increase saving in order to protect against adverse shocks. |
Dwelling investment
With dwelling investment mainly funded by mortgages, this sector is particularly sensitive to increases in interest rates. Growth in dwelling investment is forecast to be a subdued 2 per cent in 2008‑09 (Chart 4), with growth largely expected to come from alterations and additions.
Chart 4: Growth in dwelling investment
Source: ABS cat. no. 5206.0 and Treasury.
Alterations and additions have grown more strongly than new dwelling investment over the past four years. Alterations and additions grew by 5.3 per cent over the first half of 2007‑08, while new dwelling investment fell by 0.9 per cent.
Over the forecast period, the cumulative effects of increases in interest rates and tighter credit conditions are expected to have a moderating impact on growth in house prices. There is also a risk that lower levels of investor activity could put additional pressure on an already stretched rental market. Rental vacancy rates are currently at very low levels across Australia. The rental prices component of the Consumer Price Index rose by 7.1 per cent through the year to the March quarter 2008.
Business investment
New business investment has grown at well‑above‑average rates over the past five years, bringing investment as a share of GDP to around 33‑year highs in nominal terms. Strong rates of growth are expected to continue, although higher interest rates, tighter credit conditions and uncertainty in world equity and debt markets will have a dampening effect. New business investment is forecast to increase by 9½ per cent in 2007‑08 and 8½ per cent in 2008‑09 (Chart 5).
Chart 5: Growth in new business investment
Note: Includes the impact of the privatisation of Telstra.
Source: ABS cat. no. 5206.0 and Treasury.
New machinery and equipment investment is forecast to increase by 11 per cent in 2008‑09. The latest Australian Bureau of Statistics Survey of Private New Capital Expenditure and Expected Expenditure (CAPEX) implies strong rates of machinery and equipment investment. The construction, property and business services, and transport and storage sectors show particularly strong investment intentions. The mining industry will also continue to be a positive contributor, with further rises in non‑rural commodity prices supporting mining profits and investment. The strong Australian dollar is expected to further support machinery and equipment investment, as a large proportion of this investment is imported. Agricultural machinery and equipment investment, which is not included in the CAPEX, is also likely to be solid as the farm sector recovers from drought.
Total new non‑dwelling construction is forecast to grow by 5½ per cent in 2008‑09. Engineering construction is expected to be supported by a large number of projects, particularly mining projects, currently under construction. The amount of engineering construction work commenced but not yet completed remains at around record highs. Large projects currently in the construction phase include the Pluto liquefied natural gas (LNG) project, the North West Shelf LNG expansion, the Rapid Growth Project 4 iron ore expansion, the Pyrenees oil field and the Boddington gold mine expansion. There are also a large number of projects planned to begin construction over the next several years (Chart 6). However, there remains a risk that increased costs and labour supply constraints will delay some of this construction. Investment in non‑residential buildings is expected to be solid, with strong approvals for the construction of office, retail and other business premises.
Chart 6: Selected upcoming engineering construction projects
Note: All the projects shown are planned, but are yet to begin construction. The size of the circle indicates the estimated size of the project.
Source: March 2008 Access Economics Investment Monitor and Treasury liaison.
Notwithstanding the forecast for strong growth in business investment, there will be some dampening effect from higher interest rates, tighter credit conditions and global financial market uncertainty. These developments have seen business sentiment weaken considerably. Further volatility in global financial markets poses a risk to the business investment outlook.
Public final demand
Growth in public final demand is expected to slow from 4¾ per cent in 2007‑08 to 3 per cent in 2008‑09. Australian Government consumption and State and local government investment growth is forecast to slow. However, some of the expected State and local government investment in 2007‑08 may carry over into 2008‑09, given competing demands on construction resources from the private sector.
Exports and imports
Slower global growth and the higher exchange rate are expected to subdue exports of elaborately transformed manufactures and services in 2008‑09. However, rural exports are forecast to grow strongly given the assumed recovery from drought, and non‑rural commodity exports are expected to grow as mining projects expand or commence production. Overall, exports are forecast to grow by 3 per cent in 2007‑08 and 6 per cent in 2008‑09 (Chart 7). Commodity exports account for more than three quarters of the growth in exports in 2008‑09.
Chart 7: Growth in export volumes
Source: ABS cat. no. 5302.0 and Treasury.
Rural exports fell by 3.3 per cent in 2006‑07, reflecting a significant fall in farm production due to drought. The continuation of drought conditions is likely to result in rural exports falling even more in 2007‑08, reflecting no recovery in farm production and low levels of inventories. Rural exports are expected to rebound strongly in 2008‑09 with the assumption of average seasonal conditions, but are forecast to remain slightly below their pre‑drought levels (Box 4).
Growth in non‑rural commodity exports continues to show volatility and divergences between components. The overall outlook for these exports remains positive as investment projects continue to come on line. However, for some key commodities, particularly coal, export volumes will be constrained by the capacity and efficiency of transport infrastructure (see Budget Statement No. 4). Iron ore and mineral fuel exports are forecast to grow particularly strongly. Since the beginning of 2006, over $20 billion worth of iron ore, oil and gas mining and related infrastructure projects have begun production. In 2006‑07, mineral fuel exports grew by 20.5 per cent after recording average annual falls of 5.8 per cent over the preceding four years.
Growth in exports of elaborately transformed manufactures has recently been driven by pharmaceutical and road vehicle exports, while services exports have recorded strong growth in education‑related services. However, the higher exchange rate and a slowing in global growth are expected to weigh on these exports in 2008‑09.
Import volumes are forecast to grow by 11 per cent in 2007‑08 and 9 per cent in 2008‑09 (Chart 8). The slight moderation in 2008‑09 largely reflects the outlook for the domestic economy, partly offset by the higher exchange rate which makes imports cheaper. Consumption and services imports are anticipated to slow in line with the moderation in household consumption, while intermediate imports will ease with the slowing in domestic production. Capital imports are expected to be solid, consistent with strong growth in business investment.
Chart 8: Growth in import volumes
Source: ABS cat. no. 5302.0 and Treasury.
Box 4: The outlook for farm production Farm production is forecast to increase by 20 per cent in 2008‑09 following two consecutive drought years. The recovery is underpinned by a rebound in the production of cereal crops such as wheat and barley. The Australian Bureau of Agricultural and Resource Economics (ABARE) is forecasting a near doubling in wheat production in 2008‑09 (Chart A). Chart A: Wheat production
Source: ABARE. High world wheat prices and widespread summer rainfall are likely to encourage increased crop plantings, particularly as farmers aim to recover lost earnings from two poor seasons. This increased production is expected to translate into a significant increase in rural exports (Chart B). Growth in livestock production is expected to remain subdued over the forecast horizon. While the improved seasonal conditions are expected to result in increased herd rebuilding, the number of livestock slaughtered is expected to fall. Chart B: Growth in rural production
Source: ABS cat no. 5206.0, 5302.0 and Treasury. While wheat production is expected to recover significantly, the recovery in total farm GDP is forecast to be weak by historical standards due to low water storage levels. Despite good rainfall over large parts of Australia during summer, low water storage levels still persist in some of Australia's key farming regions. This is particularly the case for the Murray‑Darling Basin, which accounts for around 40 per cent of Australia's gross value of agricultural production. Constrained growth in this region will weigh on aggregate farm production. The outlook for the farm sector assumes average seasonal conditions and remains subject to considerable downside risk. The success of the 2008‑09 crop is contingent on further timely rainfall. Failure to receive sufficient rain during the critical spring period would greatly reduce the size of the harvest. |
Terms of trade
Robust growth in the emerging economies is supporting further large rises in Australia's terms of trade from levels that are already the highest in more than 50 years. This will lead to an acceleration in domestic incomes, which will contribute to already heightened price pressures. The terms of trade are forecast to increase by 4¾ per cent in 2007‑08 and 16 per cent in 2008‑09 (Chart 9). Over the 2008 calendar year, the terms of trade are forecast to rise by over 20 per cent which, if realised, would be the largest increase in a generation.
Chart 9: Terms of trade
Source: ABS cat. no. 5302.0, Reserve Bank of Australia and Treasury.
World markets for iron ore and coal remain exceptionally tight, driven by both demand and supply factors (Box 5). Recently settled Australian coal contracts have seen US dollar prices rise by between 125 and 240 per cent for the 2008‑09 Japanese fiscal year (1 April 2008 to 31 March 2009). For iron ore, negotiation of contract prices between some overseas producers and steelmakers has resulted in US dollar price increases of at least 65 per cent for the same period. While a slowdown in global growth would be expected to dampen demand and therefore world prices, this has been overshadowed in the current market for bulk commodities, where a large shortfall of supply is supporting higher prices. In contrast, base metal prices are expected to fall, reflecting increased supply in these markets and slower world growth.
Strong rural prices and falling import prices are also expected to support Australia's terms of trade. Rural prices have risen in recent times, driven by temporary supply‑side factors such as drought, as well as rising demand from emerging economies and increased biofuel production. Australian dollar import prices are expected to continue to fall, but at a slower rate given some upward pressure from higher world inflation.
Box 5: World bulk commodity markets Strong growth in world demand for coal and iron ore has rapidly outstripped supply in recent years. This has driven bulk commodity prices to record highs (Chart A). Chart A: Bulk commodity prices
Source: ABARE and Treasury. Prices for thermal and metallurgical coal have surged due to strong demand in China for coal used in electricity generation and steelmaking. Benchmark US dollar prices for the current contract period (the 2008‑09 Japanese fiscal year (JFY)) for hard coking coal are 550 per cent higher than five years ago, and for thermal coal are 365 per cent higher. A fall in China's net exports of coal provides an indication of their increase in demand. Chinese exports of coal fell by almost 40 million tonnes over the past four years. While the fall in China's net supply to international markets represents only a small share of world coal output, it has had a large price impact due to the inability of other exporters to expand supply in the near term. Recent tightness in world coal markets has been exacerbated by flooding in Australia and Indonesia, infrastructure constraints in Australia and South Africa, and world shortages of mining materials and personnel, which have put further upward pressure on prices. Iron ore contract prices have also risen significantly. Expected $US contract prices for the 2008‑09 JFY are almost five times higher than in 2002‑03. As with coal, the large price rises reflect strong demand and the limited ability of traditional iron ore exporting nations (Brazil, Australia, India, South Africa, Canada and Sweden) to meet this demand. The lack of supply from traditional exporters has meant that some of the increase in demand has come from non‑traditional, higher‑cost producers, especially China (Chart B). Chart B: World iron ore production
Source: International Iron and Steel Institute, ABARE and Treasury. |
Current account balance
The strong rise in the terms of trade is forecast to result in a small trade surplus in 2008‑09. However, the net income deficit is forecast to widen significantly, reflecting robust growth in corporate profits, particularly mining profits, and rising net interest payments from a higher stock of net foreign debt. Overall, the current account deficit is forecast to narrow to 5 per cent of GDP in 2008‑09 (Chart 10).
Chart 10: Current account balance
Source: ABS cat. no. 5302.0, 5206.0 and Treasury.
The turbulence in world debt and equity markets is affecting the outlook for the net income deficit. In the nine months to the end of April 2008, the US Federal Reserve cut its target interest rate by 325 basis points while, at the same time, corporate spreads in both the US and Australia widened substantially. This is making the outlook for future world interest rates particularly uncertain.
The outlook for the net income deficit is also heavily dependent on the relative performance of domestic and foreign profits, particularly US corporate profits. While further strength in the terms of trade is expected to support growth in Australian profits, the range of possible outcomes has widened. This is particularly the case in the US, where the extent of losses suffered by financial institutions from the recent sub‑prime mortgage crisis is still being uncovered.
From a saving and investment perspective, the narrowing of the current account deficit reflects expected higher national saving as a share of GDP and relatively unchanged national investment (Box 6).
Box 6: Net lending and the current account balance Historically, investment in Australia has been greater than domestic saving. This has been reflected in persistent current account deficits, as Australia draws on foreign saving to fund that portion of national investment that is not funded by domestic saving. Chart A decomposes Australia's net lending position — the difference between national gross saving and investment — into each of the sectors of the economy. The national net lending position represents the balance on the current and capital accounts. Chart A: Net lending by sector
Source: ABS cat. no. 5204.0 and 5206.0. For much of the past 50 years, households have been net lenders. However, over the 1980s and 1990s, households shifted to a net borrowing position in part due to financial deregulation and innovation. In the early‑2000s, there was a rapid expansion of household borrowing for housing, particularly in 2002‑03. However, the past three years have seen a fall in household net borrowing. The household saving ratio is expected to continue to rise over the forecast horizon (Box 3). The government sector has increasingly become a net lender, with general government saving more than offsetting general government investment. Despite strong growth in non‑financial corporate profits over the past five years, the non‑financial sector has remained a net borrower, reflecting high rates of investment during this time. Gross investment as a share of GDP by the non‑financial corporate sector has increased by 3.8 percentage points over this period. Business investment is forecast to remain strong. Nevertheless, the combined effect of higher household and government saving is expected to result in a narrowing of the current account deficit in 2008‑09 (Chart B). Chart B: Saving and investment
Source: ABS cat. no. 5206.0 and Treasury. | ||
Labour market, wages and consumer prices
Labour market
The expected slowing in non‑farm GDP growth from slower global growth, tighter credit conditions and higher interest rates is expected to see employment growth ease to 1¼ per cent in 2008‑09, resulting in a gradual rise in the unemployment rate to 4¾ per cent by the June quarter 2009. The participation rate is forecast to fall slightly to 65 per cent.
The strong rise in the terms of trade to date has driven strong labour market outcomes. Since the beginning of 2004, employment has grown at an average annual rate of 2.7 per cent, while the unemployment rate has fallen from 5.6 per cent in January 2004 to 4.2 per cent in April 2008. The participation rate has also risen, and immigration has become an increasingly important source of labour supply (Box 7).
Consistent with the strong rise in non‑rural commodity prices, employment growth in the mining and construction sectors has contributed solidly to total employment growth (Chart 11). Around 30 per cent of the rise in employment between 2004 and 2006 occurred in these industries, despite their share of total employment being only around 10 per cent. During 2007, however, almost all employment growth came from a range of other industries, reflecting higher incomes from the terms of trade rises flowing back through the economy, as well as capacity constraints in the mining and construction sectors. While further rises in the terms of trade will provide ongoing support for employment growth, the slowing in real economic activity is expected to have an offsetting impact over the forecast horizon.
Chart 11: Increase in employment by industry
Note: Data are through the year to December.
Source: ABS cat. no. 6291.0.55.003.
Box 7: Skilled immigration and the labour market Employment growth can have three sources — increases in the population (from either immigration or natural increase); increases in the participation rate; and reductions in the unemployment rate. Between 2004 and 2007, employment in Australia rose at an annual average rate of nearly 270,000 persons, of which 56 per cent was due to population growth, 30 per cent to increases in the participation rate and 14 per cent to reductions in the unemployment rate (Chart A). Chart A: Sources of employment growth
Source: ABS cat. no. 6202.0 and Treasury. There are clearly limits to which employment can be increased through participation. In addition, as baby boomers reach retirement age, the proportion of the population of traditional working age (15 to 64 years) will decline. And with the unemployment rate currently around its lowest level in 33 years, immigration will play an important role in driving further growth in employment. Immigration has been an important contributor to Australia's recent strong labour market outcomes. Employment increased by 290,000 persons over the year to February 2007, with almost 40 per cent of these people being recent migrants (those who arrived in Australia in 2003 or later). The participation and unemployment rates of migrants depend on a variety of factors, including age, skill level, English language proficiency and length of time in Australia. For example, migrants who enter via skilled programs tend to have better labour market outcomes. In 2004, permanent skilled migrants had a participation rate of 82.4 per cent, higher than the general population, and an unemployment rate of 4.2 per cent, below the national average at that time. Immigration will also remain important to meet areas of skill shortages in the economy. Skilled migrants and their dependants accounted for 66 per cent of immigrant visas in 2006‑07. The Government is committed to meeting skill shortages in the economy through a carefully targeted skilled migration program. The Government will increase the skilled stream of the Migration Program by 31,000 places from 2008‑09 and is intending to improve the integrity and responsiveness of temporary business long‑stay visas. |
Wages
Wages are expected to grow strongly, but are not forecast to accelerate given the anticipated easing in labour market conditions. The Wage Price Index is forecast to grow by 4¼ per cent in 2007‑08 and 2008‑09, with growth also 4¼ per cent through the year to the June quarters in both 2008 and 2009.
In recent times, wage growth has been strongest in the resource‑rich States, a trend that is likely to be reinforced by further rises in non‑rural commodity prices. Wage growth over the past two years has averaged 5.3 per cent per annum in Western Australia, 4.4 per cent per annum in Queensland, and 3.9 per cent per annum in the rest of Australia (Chart 12). This partly reflects strong wage growth in the mining and construction industries.
Chart 12: Growth in the Wage Price Index
Source: ABS cat. no. 6345.0.
Consumer prices
Several years of strong demand in the Australian economy has not been matched by a commensurate expansion in supply. This has led to a significant build‑up in underlying inflationary pressures (Box 8). The Consumer Price Index is forecast to increase by 4 per cent through the year to the June quarter 2008 and by 3¼ per cent through the year to the June quarter 2009 (Chart 13). The corresponding figures for underlying inflation are also 4 per cent and 3¼ per cent. The current broad‑based strength in price pressures reflects an economy that has been running at close to full capacity. Inflation has also been exacerbated by high energy and food prices, and specific pressures from housing costs.
Chart 13: Headline and underlying inflation(a)
- Adjusted for the effects of The New Tax System.
- The underlying inflation measure is the average of the RBA trimmed mean and weighted median.
Source: ABS cat. no. 6401.0, Reserve Bank of Australia and Treasury.
Growth in nominal unit labour costs has been strong over the past three years, reflecting a slowdown in productivity growth and a modest pick‑up in wages. As capacity constraints gradually ease, growth in nominal unit labour costs will moderate, helping to ease inflationary pressures.
Adverse supply conditions, including in Australia, have placed upward pressure on food prices both domestically and globally. Food prices rose by 5.7 per cent through the year to the March quarter 2008. There has also been strong world demand for agricultural food products. The expected recovery in Australia's farm sector may place some downward pressure on prices, although strong global demand pressures remain.
Housing costs are also expected to contribute to inflation over the forecast period. While house price growth is forecast to moderate, rising rental costs will continue to place upward pressure on inflation.
Incomes
In contrast to the slowing in real GDP growth, nominal GDP growth is forecast to pick‑up. Nominal GDP is forecast to grow by 9¼ per cent in 2008‑09 which, if realised, would be the fastest rate of growth recorded since the late 1980s. The divergence between nominal and real growth reflects strong growth in Australia's terms of trade, as well as elevated domestic price pressures that are reflected in the gross national expenditure (GNE) deflator (Chart 14).
Box 8: The emergence of inflationary pressures Underlying inflationary pressures have been building in Australia. While the risks of higher inflation have been identified for some time, recent data have revealed the extent of these pressures. Underlying inflation picked up from 2.4 per cent over 2005 to 2.9 per cent over 2006 and 3.6 per cent over 2007. It is currently running at 4.2 per cent, its highest rate in over 16 years. In common with other countries, Australia has experienced higher prices for energy and, more recently, food. These price pressures have seen inflation rise around the world (Chart A). Chart A: Global inflation
Source: IMF WEO April 2008. However, in contrast to the experience of other advanced economies, Australia has also faced strong domestic demand pressures. A long period of economic expansion, supported in recent years by the terms of trade boom, has absorbed much of the economy's spare capacity. Demand growth has been broadly based, with particular strength in business investment. The labour market has tightened, with record‑high participation and the unemployment rate at around 33‑year lows. The tight labour market, combined with shortages of skills in many industries, has led to stronger growth in wages as firms compete for suitably skilled staff. Stronger growth in wages has occurred at the same time that productivity growth has slowed. Market sector productivity growth over the past five years averaged 1.4 per cent per annum; lower than in any five‑year period since the early 1990s (Chart B). This has increased price pressures as firms seek to recover higher input costs. Chart B: Inflation and productivity
Source: ABS cat. no. 5206.0 and RBA. Inflation is forecast to remain elevated, but to gradually ease with an increase in the economy's supply capacity and a slowing in demand. |
Chart 14: Decomposition of nominal GDP growth
Note: The small discrepancy between nominal GDP and the sum of its components is due to interactions which cannot be attributed to individual components.
Source: ABS cat. no. 5206.0 and Treasury.
Broadly, nominal GDP is distributed throughout the economy as compensation of employees, gross operating surplus and gross mixed income. Compensation of employees reflects the total salary and wages paid to employees. It is forecast to grow by 8 per cent in 2007‑08 and 6¼ per cent in 2008‑09. The moderation in growth reflects the easing in labour market conditions, with wage growth expected to remain strong.
Gross operating surplus is a broad measure of profits. Corporate profits are expected to grow strongly over the forecast horizon, reflecting further strong rises in non‑rural commodity prices. The profits of private non‑financial corporations are forecast to rise by 8¼ per cent in 2007‑08 and 18¾ per cent in 2008‑09, with the sharp acceleration primarily due to strong profit growth in the mining sector.
Gross mixed income, which includes the wages and profits of farm and other unincorporated enterprises, is also forecast to increase strongly. Profits in the farm sector are expected to be strong, consistent with a recovery in farm production and high world prices for rural commodities.
The nominal economy has grown at an average annual rate of 7.6 per cent over the past three years, compared to an average annual rate of 6.2 per cent over the preceding decade. It is estimated that the cumulative addition to nominal GDP from the rise in the terms of trade is around $260 billion over the five years to 2008‑09 (Box 9).
Box 9: The impact of the terms of trade boom on the economy Rapid growth in the terms of trade since 2003‑04 has boosted nominal incomes. As a result, aggregate real incomes have grown considerably faster than real GDP. Over the past three years, average annual growth in real gross domestic income has been 1.7 percentage points higher than growth in real GDP. Quantifying this impact on nominal incomes depends on views as to how the economy would have evolved in the absence of the terms of trade rise. The simplest approach is to recalculate nominal GDP with the terms of trade held constant at their average 2003‑04 level. This captures the direct effect of higher export prices on nominal incomes. On this basis, nominal GDP is expected to be around 9 per cent, or $100 billion, higher in 2008‑09 than it would have been had the terms of trade remained at their 2003‑04 level (Chart A). Over the five years to 2008‑09, the cumulative nominal GDP gain is estimated to be around $260 billion. This approach assumes that the growth path of real variables, such as employment, is unaffected by the rise in the terms of trade. An alternative approach is to assume that key variables would have grown in line with their previous trends had the terms of trade not risen rapidly. Any divergence from trend is assumed to be due to terms of trade effects. Chart A: Nominal GDP
Source: ABS cat. no. 5206.0 and Treasury. Using this approach, total factor incomes are estimated to be 11 per cent higher in 2008‑09 than in the counterfactual. This approach also provides an indication of effects on components of GDP. The largest income boost is to corporate profits, which are estimated to be 20 per cent higher in 2008‑09. Employees are also estimated to have benefited significantly from the terms of trade boom. Labour income is estimated to be 9 per cent higher in 2008‑09 than in the counterfactual. Part of the increase in labour income is due to stronger growth in employment. The level of employment in 2008‑09 is estimated to be 2 per cent, or 200,000 persons, higher than in the counterfactual. |
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