Statement 2: Economic Outlook
The global economy is experiencing the sharpest synchronised downturn since the Great Depression, and is expected to contract in 2009 for the first time in six decades. The magnitude and speed of transmission of the global recession means that a recession in Australia has become inevitable. Strong and rapid policy action from the Australian Government and the Reserve Bank of Australia is helping to cushion the severe impact of the global recession on the Australian economy and employment. This action is one reason Australia is expected to experience a milder contraction than virtually all other advanced economies. Supported by policy, a recovery in the Australian economy is expected to gather pace over 2010.
The effects of the global financial crisis have surged through all advanced economies, destroying wealth, sapping confidence, and leading to a collapse in global trade. The scale of this downturn means that emerging economies have not been spared, with growth in these economies slowing significantly.
A collapse in global demand and production has seen commodity prices fall significantly. Australia's terms of trade are expected to decline from recent record highs, taking around $35 billion out of the economy in 2009‑10. Business investment is expected to contract in the face of lower global and domestic demand. Households are confronting a sharp fall in wealth, with global stock markets falling sharply and the market almost halving in value in Australia.
Australia is expected to withstand these global pressures better than most other countries. The Australian financial system remains sound, and timely and substantial fiscal policy stimulus and lower interest rates are helping to moderate the effect of the global downturn on the domestic economy. Nevertheless, the global recession has become so severe that policy cannot completely offset the effects on the Australian economy.
The slowdown in the domestic economy will have unavoidable consequences for the labour market. Employment is expected to contract over 2009‑10 before gradually strengthening over 2010‑11. The unemployment rate will continue to rise over the forecast period, peaking at 8½ per cent in 2010‑11. Inflation has already begun to moderate, and is likely to be subdued over the forecast period.
At a time of significant global upheaval, considerable risks surround these forecasts. The global economy remains fragile and could deteriorate further, with flow‑on consequences for the Australian economy. However, international policy action, and prospects for an earlier recovery in China, could support a sharper turnaround than currently expected.
The world economy is expected to contract by 1½ per cent in 2009, the first contraction in six decades. No economy has been immune from the global financial crisis. Advanced economies are in the midst of a deep recession, having borne the initial brunt of the crisis, with real GDP expected to contract by 3¾ per cent in 2009. A recovery is not expected to gather pace until mid‑2010. Growth in emerging economies has also slowed sharply, and they are expected to record below‑trend growth in the period ahead.
Australia's real GDP is forecast to contract in 2009‑10, an inevitable consequence of the magnitude of the global recession. A fall of ½ of a per cent is forecast for 2009‑10. The main contributors to the slowdown are sharp falls in business investment and exports, as well as a smaller contraction in household consumption. Strong growth in public investment is providing a substantial buffer to weakness elsewhere in the economy, moderating the size of the slowdown. Supported by policy, a recovery in the economy is expected to gather pace over 2010, although with growth remaining below trend in 2010‑11 at 2¼ per cent.
Household consumption is expected to contract by ¼ of a per cent in 2009‑10. This is a mild fall compared with many other advanced economies, despite the substantial negative shocks stemming from the global recession. The large falls in household wealth stemming from the collapse in global stock markets, combined with concern about rising unemployment, are expected to continue to weigh heavily on household confidence and consumption. Helping to moderate these negative effects is substantial assistance to the household sector from government stimulus packages, cuts to interest rates, and falls in oil prices. While this assistance has helped support economic activity, it cannot fully offset the negative effects of the global recession.
Dwelling investment is forecast to be subdued in the short term, with activity remaining flat through 2009‑10, in line with recent weak building approvals data. The sector is expected to stage a solid recovery in 2010‑11 with growth of 11½ per cent. Recent sharp cuts to interest rates, ongoing strong population growth and the First Home Owners Boost are expected to support the recovery.
Business investment is expected to contract sharply in 2009‑10, falling by 18½ per cent. Strong investment activity in the mining sector has resulted in business investment recently reaching a four‑decade high as a share of GDP. The collapse in global commodity prices, and weaker global and domestic demand, is expected to result in business investment returning rapidly to its pre‑commodity boom share of GDP over the forecast period. Momentum from a number of large engineering projects is expected to provide some support to the sector.
Public final demand is forecast to fill some of the gap created by the contraction in private demand, growing by 7¾ per cent in 2009‑10 and remaining at a high level in 2010‑11. Growth will be led by a rise of almost 25 per cent in total public investment, the strongest on record, as investment from a range of stimulus packages flows through to increases in activity.
Exports are forecast to fall in 2009‑10, consistent with the contraction in world trade. An overall fall of 4 per cent is expected, reflecting large falls in exports of elaborately transformed manufactures, non‑rural commodities and services, partially offset by a continued recovery in rural exports. Overall, exports are forecast to recover in 2010‑11 as global demand recovers.
Imports are forecast to contract by 6½ per cent in 2009‑10, in line with the slowing in domestic demand and the depreciation of the Australian dollar since its peak in mid‑2008. The fall in imports is expected to be broad‑based, but led by a contraction in capital goods imports, given the sharp declines expected in business investment and its relatively import‑intensive nature.
The terms of trade are forecast to fall by 13¼ per cent in 2009‑10, taking them back to around 2006‑07 levels. Commodity prices are expected to fall significantly in 2009‑10. This fall comes after successive increases in key bulk commodity prices drove the terms of trade to a six‑decade high. The global recession has seen a turnaround in demand for commodities, with industrial production falling sharply around the world and global trade collapsing.
The current account deficit is expected to widen to 5¼ per cent of GDP in 2009‑10. The trade balance is forecast to move back into deficit as commodity prices unwind, while the net income deficit is forecast to remain relatively stable as a share of GDP.
Employment is expected to fall by 1½ per cent through the year to the June quarter 2010 as the global recession impacts on the domestic economy. Employment is expected to recover through 2010‑11, rising by ½ of a per cent through to the June quarter 2011. This would see the unemployment rate rise to 8¼ per cent by the June quarter 2010, peaking at 8½ per cent in 2010‑11. The participation rate is forecast to decline by 1¼ percentage points from its recent record high, reaching 64¼ per cent by the June quarter 2011.
Wages growth is expected to slow from recent solid rates to 3¼ per cent through the year to the June quarter of both 2010 and 2011, reflecting the easing in labour market conditions.
Inflation is forecast to continue to moderate over the forecast period, as the global recession eases previous demand pressures. Both headline and underlying inflation are expected to slow to 1¾ per cent through the year to the June quarter 2010, and 1½ per cent through the year to the June quarter 2011.
Nominal GDP is forecast to fall by 1½ per cent in 2009‑10, reflecting the contraction in real GDP of ½ of a per cent and the expected substantial decline in the terms of trade that will result in the non‑farm GDP deflator declining by 1 per cent in that year.
Table 1: Domestic economy forecasts(a)
- Percentage change on previous year unless otherwise indicated.
- Calculated using original data.
- Chain volume measures except for nominal gross domestic product which is in current prices.
- Excluding second‑hand asset sales from the public sector to the private sector.
- Percentage point contribution to growth in GDP.
- Through the year growth rate to the June quarter.
- Estimate for the June quarter.
Note: The forecasts are based on several technical assumptions. The exchange rate is assumed to remain around its recent average level — a trade‑weighted index of around 59 and a United States dollar exchange rate of around 72 US cents. Interest rates are assumed to move broadly in line with market expectations. World oil prices (Malaysian Tapis) are assumed to remain around US$56 per barrel. The farm sector forecasts are based on an assumption of average seasonal conditions in the future, but account for current low water storage levels.
Source: Australian Bureau of Statistics (ABS) cat. no. 5206.0, 5302.0, 6202.0, 6345.0, 6401.0, unpublished ABS data and Treasury.
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