The deepening global recession is having a significant impact on the Australian economy, with GDP forecast to contract by ½ of a per cent in 2009‑10. Without early and decisive policy action, the forecast contraction would have been four times larger. In the absence of Government action, the level of GDP would be 2¾ per cent lower in 2009‑10 and 1½ per cent lower in 2010‑11. Government action is expected to support up to 210,000 jobs and, without it, the forecast unemployment rate would reach 10 per cent. Supported by policy, a recovery in the Australian economy is expected to gather pace over 2010.
Early and decisive policy action by the Government is an important reason why Australia is better placed than most other advanced economies, which are collectively expected to contract by 3¾ per cent in 2009. As a result of Government action, Australia is expected to experience a milder downturn, and emerge in a stronger position than most other advanced economies.
Australia has benefited in recent years from the largest terms of trade boom in six decades. The collapse in global demand is reversing some of these gains, with the terms of trade forecast to fall by 13¼ per cent in 2009‑10, taking around $35 billion out of the economy on an ongoing basis. The fall in the terms of trade and the contraction in the real economy will together reduce nominal GDP by an expected 1½ per cent. This in turn will lead to large falls in Government revenue and substantially weaken the fiscal position.
The major economic parameters used in preparing the Budget are contained in Table 1.
Table 1: Major economic parameters(a)
- Real and nominal GDP parameters are year average. CPI and employment are through the year growth to the June quarter. The unemployment rate is the rate in the June quarter.
Public investment is helping to fill some of the gap left by the collapse in private demand. Funding flowing from the 2009‑10 Budget, the Nation Building and Jobs Plan, the November Council of Australian Governments reforms and the December Nation Building Package is providing a significant boost to public investment, which is expected to grow by around 25 per cent in 2009‑10, the fastest rate of growth on record.
The global recession and the domestic economic slowdown will have unavoidable consequences for Australia's labour market. Employment is expected to contract through to mid‑2010, leading to a substantial rise in the unemployment rate, which is forecast to peak at 8½ per cent in 2010‑11. The Government's economic stimulus is estimated to reduce the peak unemployment rate by 1½ percentage points.
Australia is expected to perform better than most other advanced economies in 2009 (Chart 1). There are a number of factors which make Australia better placed to weather the global recession and to stage an earlier and stronger recovery than many other countries.
Chart 1: Forecast GDP growth in 2009(a)
- Australian data refer to forecasts for 2009‑10.
Timely and substantial policy action by the Government is supporting the economy and jobs, through fiscal stimulus and other measures. While fiscal stimulus in other advanced economies was in some cases belated, the Australian Government acted early and decisively once the prospect of a global recession became clear.
There is substantial evidence that last year's Economic Security Strategy has supported retail spending and employment. Following the first economic stimulus package, consumer spending has held up in Australia, despite continued falls in other advanced economies in recent months.
The Australian economy is also benefiting from strong financial institutions and sound regulatory frameworks, which have enhanced the effectiveness of monetary policy in stimulating activity. The Reserve Bank of Australia has cut official interest rates by a total of 425 basis points, resulting in the lowest mortgage interest rates in more than 40 years.
The Australian housing sector is in better shape than in most other advanced economies, with more rigorous lending practices by Australia's financial institutions helping to prevent the kind of mortgage defaults seen in the United States. The First Home Owners Boost has also spurred activity in the housing sector since its introduction last year, with dwelling investment expected to lead the economic recovery in 2010‑11.
Australia will benefit from being situated in the most dynamic region in the global economy. Once the global economy begins to recover, Asia is expected to be a key engine of growth. China is showing signs of recovery from the crisis, and Australia's strong trade linkages with China will assist a recovery in our domestic economy.
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