The Australian economy slowed significantly during the global downturn, but weathered the crisis better than most other advanced economies, supported by timely and substantial policy stimulus. The economy grew by 1.4 per cent during 2009 — a full 4½ percentage points above the advanced economy average. Without fiscal stimulus, it is estimated that the economy would have contracted by 0.7 per cent in 2009. The labour market held up remarkably well with Australia having one of the lowest unemployment rates among the advanced economies.
The shallower downturn has meant that Australia has largely avoided the business failures and large‑scale employment losses that have occurred in many other countries, providing a solid foundation for the recovery.
The positive outlook is being increasingly underpinned by an improved global outlook and by our close trade links to the rapidly growing Asian region, and in particular China. Large emerging economies are growing strongly, providing an impetus to global growth, supported by a modest recovery in the major advanced economies. The global economy is forecast to grow by 4¼ per cent in both 2010 and 2011, with stimulus measures continuing to support global growth this year.
Against this backdrop the Australian economy is forecast to grow by 3¼ per cent in 2010‑11, rising to 4 per cent in 2011‑12. Private sector activity is expected to be the key driver of growth, as the Government's fiscal stimulus is phased out and detracts from GDP growth.
Improved external conditions should significantly increase demand for Australian exports, boosting the terms of trade and supporting a recovery in business investment.
Solid private sector growth, and continued labour market strength, should see the economy return to full employment more quickly than previously expected.
Nominal GDP is expected to grow strongly in both 2010‑11 and 2011‑12, a sharp turnaround from 2009‑10, which is expected to be the weakest outcome since the early 1990s recession. Nominal GDP is forecast to grow by 8½ per cent in 2010‑11, underpinned by a recovery in the real economy together with strong growth in output prices driven by rising non‑rural commodity prices. Nominal GDP is forecast to grow by 5¾ per cent in 2011‑12.
The global economy nevertheless presents risks to the domestic outlook. Advanced economies have to work through an extended period of financial sector balance sheet repair and fiscal consolidation. Concerns about fiscal sustainability have the potential to spill over from the EU periphery to other highly indebted countries and to financial markets more broadly. China faces challenges following the implementation and subsequent withdrawal of stimulus measures, particularly in relation to managing inflation pressures. To date, China has managed these risks successfully. On the upside, there is the potential for the global economy to recover more strongly, with flow‑on effects to the Australian economy.
Summary of forecasts
The world economy is experiencing a nascent and uneven recovery. It is expected to grow by 4¼ per cent in both 2010 and 2011, led by a resurgence of growth in the developing Asian economies. A prolonged period of financial sector balance sheet repair and fiscal consolidation will act as a drag on recovery in the advanced economies. The potential for the sovereign debt crisis in Greece to spread to other countries and seriously impact broader financial markets is a significant risk for the world economy.
Australia's real GDP is forecast to grow by 3¼ per cent in 2010‑11 and 4 per cent in 2011‑12. The main contributors to economic growth are expected to be household consumption, business investment and exports. Public sector demand will ease as the fiscal stimulus is withdrawn.
Household consumption is expected to continue to recover. A strong labour market, sustained improvements in consumer confidence and higher asset prices are expected to see household consumption grow by 3½ per cent in 2010‑11 and 4 per cent in 2011‑12.
Dwelling investment is forecast to grow by a strong 7½ per cent in 2010‑11. There is currently a significant pipeline of dwelling construction work to be completed. Strong population growth and low vacancy rates should continue to support activity in the dwelling sector, although this is likely to be tempered by higher mortgage interest rates.
Business investment is expected to rise significantly in both 2010‑11 and 2011‑12. The Small Business and General Business Tax Break has supported machinery and equipment investment in recent times, but strong business confidence and easing credit conditions are expected to support a broader‑based recovery, recent interest rate increases notwithstanding. A surge in new mining investment is expected as a number of large projects come on line. Non‑residential building investment is expected to remain subdued before recovering in response to the broader economic recovery.
Public final demand, having risen strongly in 2009‑10, is forecast to moderate in 2010‑11 and 2011‑12, reflecting the unwinding of the Government's fiscal stimulus measures and a broader moderation in spending growth across other levels of government.
Exports are forecast to grow solidly in both 2010‑11 and 2011‑12, as the world economy continues to strengthen and new resources production comes on line. The recovery in exports is expected to be broad‑based, but with particular strength in non‑rural commodity exports.
Imports are expected to increase strongly in both 2010‑11 and 2011‑12, reflecting rising domestic demand and a strong Australian dollar. The growth in imports is expected to be broadly based, although the contribution of capital goods imports — driven by the capital expenditure of major mining projects — is expected to be substantial.
The terms of trade are forecast to rise by 14¼ per cent in 2010‑11 to their highest level in 60 years, largely due to strong price rises for Australia's iron ore and coal exports, driven by a recovery in global demand. Commodity prices are expected to moderate somewhat in 2011‑12, but still remain at high levels. High commodity prices have caused a substantial supply response and this will increasingly weigh on prices as supply comes on stream. The medium‑term projections assume that the terms of trade will fall over the medium term, as world supply increases.
The current account deficit is forecast to narrow in 2010‑11, reflecting the expected sharp rise in the terms of trade, before expanding to 5 per cent of GDP in 2011‑12 in response to rising import volumes and a modest fall in the terms of trade. The higher terms of trade are expected to push the trade balance into temporary surplus in 2010‑11, although the trade balance is expected to return to deficit in 2011‑12. The net income deficit is expected to widen over the forecast period, as improved export earnings generate increased equity income outflows.
The unemployment rate is expected to continue to fall, reaching 5 per cent by the end of 2010‑11 and 4¾ per cent by the end of 2011‑12, around its full employment rate. Employment is expected to grow by 2¼ per cent through the year to the June quarter 2011 and 2 per cent through the year to the June quarter 2012, absorbing strong growth in the labour force associated with rapid growth in the working age population and an expected increase in the participation rate.
Wages growth is expected to recover after growing close to its slowest rate on record through 2009. The Wage Price Index is expected to grow by 3¾ per cent through the year to the June quarter 2011 and 4 per cent through the year to the June quarter 2012.
Underlying inflation is expected to stabilise at around 2½ per cent through 2010‑11 and 2011‑12. Headline inflation is expected to be 3¼ per cent through the year to the June quarter 2010 and 2½ per cent through the year to the June quarter of both 2011 and 2012.
Nominal GDP is forecast to grow by 8½ per cent in 2010‑11. This strength reflects growth in the GDP deflator of 5 per cent, largely driven by substantial increases in the terms of trade.
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.
- Seasonally adjusted, through‑the‑year growth rate to the June quarter.
- Seasonally adjusted estimate for the June quarter.
- Through‑the‑year growth to 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 70 and a United States dollar exchange rate of around 90 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$88 per barrel. The farm sector forecasts are based on an assumption of average seasonal conditions.
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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