Statement 2: Economic Outlook (Continued)
The fundamentals of the Australian economy remain strong and the outlook is favourable, with solid growth, low unemployment and well‑contained inflation.
The level of output is well above pre‑global financial crisis levels and the economy is expected to grow around its trend rate over the next two years. GDP growth is forecast to be 3¼ per cent in 2012‑13 and 3 per cent in 2013‑14, with the economy expected to outperform every major advanced economy over this period (Chart 1).
Chart 1: Real GDP growth
Source: ABS cat. no. 5206.0, national statistical agencies, Thomson Reuters and Treasury.
Global financial stresses eased somewhat in the early months of 2012, after the period of acute instability in late 2011, but the global economy remains weak and the global outlook remains uncertain. Many advanced economies are yet to return to pre‑global financial crisis output levels and face the substantial task of putting public finances on a sustainable footing while simultaneously supporting growth.
While there have been encouraging signs in the United States in recent months, the euro area appears to have, and the United Kingdom has, re‑entered recession. There has also been some recent re‑emergence of elevated risk aversion in global markets, particularly in relation to concerns about Spain's fiscal and financial stability.
Against this backdrop, there are dramatic structural changes underway in the global economy, with economic activity shifting towards Asia. This uneven pattern of global growth is expected to see emerging economies, particularly China and India, account for around three‑quarters of global growth over the next two years. China is forecast to grow at an average annual rate of over 8 per cent over the next two years and India around 7 per cent.
With external demand from Asia expected to remain strong, particularly for non‑rural commodities, Australia's exports are forecast to grow solidly and non‑rural commodity prices are expected to remain high, notwithstanding some forecast decline as global supply expands.
While the terms of trade are likely to have passed their peak, they remain close to historical highs, supported by sustained strength in commodity prices. The terms of trade are forecast to decline over the forecast period, with non‑rural commodity prices expected to ease as global supply increases, including from Australia. The terms of trade are projected to decline gradually over the medium term. Notwithstanding this, high commodity prices and activity in the resources sector should continue to support incomes and activity in the broader economy.
Robust demand in Asia should continue to underpin the strong outlook for the resources sector, where investment has reached unprecedented levels. Businesses expect to invest a record $120 billion in the resources sector in 2012‑13, around 150 per cent higher than its level just two years before, and 13 times the level of investment before the first phase of the boom. The resources investment pipeline is currently over $450 billion, with more than half of these projects already committed or under construction. Over the forecast period, new business investment as a proportion of GDP is expected to reach its highest level on record.
Strong growth in the resources sector is expected to continue to spill over into other sectors, including parts of the construction sector, parts of manufacturing and parts of the services sector. Together, the resources and the resources‑related sectors of the economy are expected to account for 15 to 20 per cent of total GDP over the forecast horizon and grow by an average of nearly 9 per cent per year (Chart 2). However, conditions remain difficult for those sectors not benefiting directly or indirectly from the resources boom. Many sectors are facing challenging conditions from the high Australian dollar, ongoing global instability and uncertainty, and consumer caution.
The high Australian dollar is weighing particularly heavily on trade‑exposed sectors of the economy such as manufacturing and tourism. Ongoing global uncertainty has also reinforced the cautious behaviour that consumers have shown since the global financial crisis and they remain reluctant to take on more debt. This is particularly challenging for the retail sector and other sectors linked to the retail sector such as wholesale trade and road transport. Weak demand and tight credit conditions are also making conditions challenging in parts of the construction sector. While some of the headwinds outside the resources sector are likely to be temporary, some are structural, reflecting the transition that is currently underway across the economy. Overall, the non‑resources part of the economy is forecast to grow at a below‑trend average annual rate of 2 per cent over the next two years.
Chart 2: Growth in resources/resources‑related and non‑resources activity
Note: Bars are the average annual growth rate over the two financial years. Growth in 2011‑12 is an estimate.
Source: ABS cat. no. 5206.0, 5209.0 and Treasury.
Within the non‑resources part of the economy, there is also considerable divergence between sectors and even within sectors. Indeed a complex transition is taking place in the economy, only part of which is driven by the resources boom and the high Australian dollar. Further dimensions of this transition are being driven by shifts in household spending patterns towards services, changed attitudes towards debt, broader competitive pressures and technological change, which are leading to shifts in the patterns of domestic and external demand.
These forces are being reflected in significant shifts in the sectoral composition of growth and employment which have more dimensions than suggested by the simple resources/non‑resources divide. The patchwork economy is multifaceted. While growth in the resources part of the economy has been exceptional in recent years, there has also been strong growth in sectors such as health care and social assistance, professional scientific and technical services, and education and training. At the same time, conditions have been particularly challenging in retail trade, manufacturing and non‑resources related construction. However, even within the slower growing sectors there have been pockets of strength. More generally there is ongoing product and process innovation right across the economy as businesses adjust their business models to take advantage of emerging opportunities.
The complexity of the transition is also reflected in the labour market. While employment growth has been weak in some non‑resources sectors, there has been strong growth in others. Despite the geographic concentration of resources activity and employment, the aggregate unemployment rate has remained low and the dispersion of regional unemployment rates has continued to decline since the start of the mining boom. The continued fall in the regional dispersion of unemployment over this period shows that, despite the uneven pattern of growth in the economy and across regions, the benefits of the strong economy are being spread broadly across Australia.
Employment growth is expected to remain solid over the forecast period, but reflect the uneven growth pattern across the economy. While employment in the resources sector and parts of the services sector has grown solidly over the past year, aggregate employment growth has slowed after robust growth in 2010, as continued global weakness and instability, the high dollar, cautious consumer behaviour and shifting patterns of domestic spending have seen employers reluctant to take on new workers.
Notwithstanding the unevenness in the patchwork economy, the unemployment rate has remained low and been relatively stable. At close to 5 per cent, it is also lower than in most other advanced countries. The unemployment rate is around half that in the euro area and significantly below that in the United States. In aggregate, employment is expected to grow 1¼ per cent through the year to the June quarter of 2013 and 1½ per cent through the year to the June quarter of 2014. The unemployment rate is expected to drift up to 5½ per cent by the June quarter of 2013. With the economy growing around trend, inflation is expected to remain contained, notwithstanding a temporary increase associated with the introduction of a carbon price in 2012‑13.
The outlook for trend growth in the economy over the next two years is consistent with the fiscal consolidation being undertaken by the Commonwealth and state governments. As is standard practice, the forecasts assume policy interest rates move broadly in line with market expectations at the time that the forecasts are finalised, with the market expectation at that time being that policy interest rates would be lower over the coming year. The planned fiscal consolidation should continue to provide scope for monetary policy to be eased, if appropriate, without generating price and wage pressures. The impact of the fiscal consolidation, particularly in 2012‑13, should be more than offset by growth in private demand, particularly from the resources sector, with the aggregate economy growing around trend.
Although the outlook for the Australian economy is positive, substantial downside risks remain. The key international risk is the potential for a re‑escalation of the euro area sovereign debt crisis. The capacity of many advanced economies to respond is limited and any further weakness could flow through to the emerging economies of Asia and to Australia. The prospect of a sharp rise in oil prices in the event of escalating tensions in the Middle East is also a risk to the global outlook.
Domestically, the transition taking place in the economy poses a risk for the labour market as these transitional frictions could see a temporary rise in the unemployment rate while businesses adjust to the evolving patterns of demand.
Box 1: International comparisons
Australia's economy continues to outperform most other advanced economies. Australia has outperformed nearly all advanced economies since the global financial crisis with both economic growth and employment growth much stronger.
The Australian economy has grown by over 7 per cent on its pre‑GFC levels. By contrast, the United States economy has grown by around 1½ per cent, and both the euro area and Japan have not made up lost ground (Chart A).
Chart A: GDP international comparison
Source: ABS cat. no. 5206.0, national statistical agencies, Thomson Reuters and Treasury.
Australia's outperformance is expected to continue. By the end of the forecast period, cumulative growth of Australian GDP since the GFC is expected to have been around 16½ per cent. This is well above that expected from the United States (around 6½ per cent), Japan (around 2 per cent) and the euro area (which is expected to have not made up the lost ground by the end of the period).
This outperformance has also been reflected in much stronger labour market outcomes in Australia.
Australia's labour market has performed strongly since the onset of the global financial crisis in September 2008.
While many advanced economies experienced significant rises in their unemployment rates during the global financial crisis, the unemployment rate rose less than 2 percentage points in Australia — from 4.0 to 5.9 per cent (Chart B).
Chart B: Unemployment rates
Source: ABS cat. no. 6202.0, national statistical agencies, Thomson Reuters and Treasury.
Following the global financial crisis, strong employment growth saw the Australian unemployment rate fall to around 5 per cent.
More recently, in Australia, the high dollar and global weakness and instability have unsettled consumers and made businesses more hesitant in their hiring decisions, which has led to much slower employment growth over the past year. The slowdown follows particularly strong employment growth in 2010, reflecting pre‑emptive hiring in some sectors.
In contrast, employment in the United States and euro area is yet to return to pre‑crisis levels (Chart C).
While Australia has added more than 750,000 jobs since the end of 2007, more than 25 million jobs have been lost around the world, including more than 3 million in the euro area and around 5 million in the United States. There are now around 200 million unemployed people worldwide.
Chart C: Employment
Note: Data for the euro area are quarterly. Employment data for Japan from March 2011 to August 2011 are not available due to the impacts of the Japanese earthquake and tsunami.
Source: ABS cat. no. 6202.0, national statistical agencies, Thomson Reuters and Treasury.
However, despite a range of pressures, the Australian unemployment rate has remained low, and at 5.2 per cent is lower than in every major advanced economy except Japan.
World GDP growth is expected to pick up over the forecast period, albeit from a position of considerable weakness, as strong growth in emerging market economies moderates slightly and recoveries in the large advanced economies slowly gather momentum. The world economy is forecast to grow 3½ per cent in 2012, 4 per cent in 2013 and 4¼ per cent in 2014.
Australia's major trading partners (export weighted) as a group are expected to grow strongly over the forecast period, reflecting the rapid growth of emerging Asia, particularly China. Major trading partner growth is forecast to be 4¼ per cent in 2012 and 5 per cent in both 2013 and 2014.
Australia's real GDP is forecast to grow 3¼ per cent in 2012‑13 and 3 per cent in 2013‑14 (Chart 3). The main drivers of economic growth are expected to be business investment and exports.
Chart 3: Growth in real GDP
Source: ABS cat. no. 5206.0 and Treasury.
Household consumption is expected to grow moderately over the forecast period, broadly in line with household income growth. Nevertheless, consumers remain cautious and the household saving rate is expected to remain elevated. Household consumption is expected to grow 3 per cent in both 2012‑13 and 2013‑14.
Dwelling investment is expected to remain subdued over the forecast period, with households reluctant to take on more debt and some investors hesitant because of the prospect of continued subdued house price growth. Dwelling investment growth is expected to be flat in 2012‑13 before rising to 2½ per cent in 2013‑14.
New business investment is expected to continue growing strongly over the forecast period, reaching a record share of GDP in 2013‑14. This reflects an expectation of unprecedented investment in the resources sector, with investment elsewhere in the economy expected to be more subdued. New business investment growth is expected to be a strong 12½ per cent in 2012‑13 and 8 per cent in 2013‑14.
Public final demand is expected to fall in 2012‑13 and remain flat in 2013‑14, with falling Commonwealth Government spending in 2012‑13 partially offset by modest increases in state spending, consistent with recent state budget updates, notwithstanding the fiscal consolidation plans announced by most state governments.
Exports are expected to grow 4½ per cent in each of 2012‑13 and 2013‑14 as non‑rural commodity export capacity continues to expand to meet global demand. However, the high Australian dollar is expected to weigh on growth of exports of manufactures and services, notwithstanding the positive outlook for major trading partner growth.
Imports are expected to grow 7½ per cent in 2012‑13 and 5½ per cent in 2013‑14, underpinned by record levels of investment in the resources sector and the high Australian dollar. While import growth is expected to be broad‑based, capital goods imports associated with the booming liquefied natural gas sector are expected to be a key driver of the increase.
The terms of trade are expected to decline 5¾ per cent in 2012‑13 and 3¼ per cent in 2013‑14, as increases in global supply, led by Australia, place downward pressure on non‑rural commodity prices. Despite these forecast falls, the terms of trade are expected to remain close to their highest sustained levels in 140 years.
The current account deficit is expected to widen to 4¾ per cent of GDP in 2012‑13 and 6 per cent of GDP in 2013‑14. This largely reflects the forecast shift of the trade balance from surplus in 2011‑12 to deficit in both 2012‑13 and 2013‑14 because of a strong rise in resources investment‑related imports and the expected decline in the terms of trade.
Employment growth is expected to be 1¼ per cent through the year to the June quarter of 2013 and 1½ per cent through the year to the June quarter of 2014, reflecting solid overall economic growth, notwithstanding the challenging conditions in some sectors of the economy. The unemployment rate is expected to drift up to 5½ per cent by the end of 2012‑13 and remain there through 2013‑14. The participation rate is forecast to remain close to historical highs at around 65¼ per cent.
Wages growth is expected to remain around trend over the forecast period, in line with expected subdued labour market conditions and the moderate inflation outlook. The Wage Price Index is expected to grow 3¾ per cent through the year to the June quarters of both 2013 and 2014.
Underlying inflation is expected to be 2¾ per cent through the year to the June quarter of 2013, including a ¼ of a percentage point increase from the introduction of the carbon price in 2012‑13. Underlying inflation is expected to ease to 2½ per cent through the year to the June quarter of 2014.
Headline inflation is expected to be 3¼ per cent through the year to the June quarter of 2013, including a ¾ of a percentage point increase from the introduction of the carbon price. Headline inflation is expected to ease to 2½ per cent through the year to the June quarter of 2014.
Nominal GDP is expected to grow 5 per cent in 2012‑13 and 5¼ per cent in 2013‑14, reflecting forecast close‑to‑trend growth in the real economy and the expected decline in the terms of trade.
Table 1: Domestic economy forecasts(a)
(a) Percentage change on preceding year unless otherwise indicated.
(b) Calculated using original data unless otherwise indicated.
(c) Chain volume measures except for nominal gross domestic product which is in current prices.
(d) Excluding second‑hand asset sales from the public sector to the private sector.
(e) Percentage point contribution to growth in GDP.
(f) Seasonally adjusted, through‑the‑year growth rate to the June quarter.
(g) Seasonally adjusted rate in the June quarter.
(h) Through‑the‑year growth rate to the June quarter.
Note: The forecasts for the domestic economy are based on several technical assumptions. The exchange rate is assumed to remain around its recent average level — a trade‑weighted index of around 77 and a US$ exchange rate of around 103 US cents. Interest rates are assumed to move broadly in line with market expectations at the time the forecasts were finalised. World oil prices (Malaysian Tapis) are assumed to remain around US$126 per barrel. The farm sector forecasts are based on a return to average seasonal conditions over 2012‑13 and 2013‑14.
Source: ABS cat. no. 5206.0, 5302.0, 6202.0, 6345.0, 6401.0, unpublished ABS data and Treasury.
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