Statement 2: Economic Outlook (Continued)
Export volumes are forecast to increase solidly in 2012‑13 and 2013‑14, as the current resources investment boom translates into significant new production and export capacity in the resources sector. Exports are expected to continue to be supported by the strong outlook for Australia's major trading partners (Box 6), which is offsetting some of the drag caused by the high Australian dollar. Exports are forecast to increase by 4½ per cent in each of 2012‑13 and 2013‑14.
Non‑rural commodity exports are expected to grow strongly over the next two years as ongoing expansions in mines, ports and rail capacity facilitate greater production and export volumes. There are currently a number of major expansions underway in Western Australia and along the east coast, which are expected to significantly boost iron ore and coal exports over the next two years, notwithstanding some expected delays, particularly in regard to metallurgical coal. Non‑rural commodity exports are expected to grow 7½ per cent in 2012‑13 and 5½ per cent in 2013‑14.
Rural exports are expected to increase 8 per cent in 2011‑12 and remain at historically high levels over the next two years, in line with a strong outlook for farm production. Favourable seasonal conditions for the winter crop, particularly in Western Australia, are expected to result in a record crop, notwithstanding lower yields in the eastern states associated with adverse weather conditions. Recent rainfall is bringing increased availability of irrigation water and improved sub‑soil moisture levels and is expected to support a strong summer crop in 2012‑13.
Elaborately transformed manufactures exports are expected to rise modestly over the next two years. While demand is expected to rise in line with the strong outlook for Australia's major trading partners, the high exchange rate is expected to continue to weigh on growth. Elaborately transformed manufactures exports are expected to increase 2½ per cent in 2012‑13 and 3 per cent in 2013‑14.
Services exports have been trending downwards for the past two years, and this weakness is expected to continue in the near term. The high Australian dollar is weighing heavily on some sectors, particularly tourism and exports of education‑related travel services. Exports of services are expected to fall 5½ per cent in 2011‑12 before recovering slowly, growing 1½ per cent in 2012‑13 and 3 per cent in 2013‑14.
Box 6: The impact of emerging Asia on Australian exporters
The global economy is undergoing a dramatic structural change with the weight of economic activity shifting quickly towards Asia.
Emerging economies, particularly in Asia, have become a key driver of global growth (Chart A). Emerging economies are expected to contribute around three quarters of the world's economic growth over the next five years.
Australia's natural resource base and location in the Asian region have allowed our exporters to take advantage of the expanding markets of emerging Asia at a time of relative weakness in the world's advanced economies.
Chart A: Contributions to global growth
(5‑yr annual average)
Note: IMF forecasts 2012‑16.
Source: IMF and Treasury.
While China has been a significant contributor due to its size and strong growth, all the key emerging economies of Asia (including India, Indonesia, Malaysia and Vietnam) have grown more rapidly than the advanced economies.
Australian businesses have been re‑orientating their exports toward emerging Asia for many years and this shift has been even more marked since the global financial crisis (Chart B).
Chart B: Merchandise export shares
Source: ABS cat. no. 5368.0 and Treasury.
The re‑alignment is most stark for commodities but is evident in all major export classes (Chart C).
Chart C: Emerging Asia's share of
major export classes
Source: Department of Foreign Affairs and Trade and ABS cat. no. 5368.0.55.003.
The emergence of Asia is likely to provide increasing opportunities for Australia's manufacturing and service sectors. With large populations and strong incomes growth, China and India are expected to experience a surge in middle income consumers in coming years. By 2030 there are expected to be over 3 billion people in the middle income bracket in the Asia Pacific region. As their incomes increase they will spend more on high‑value manufactured goods (such as medical and pharmaceutical products) and services (such as health, education, finance and tourism), and food, providing opportunities for Australian businesses.
These changes are already underway. For example, over the past decade Chinese visitor arrivals have increased from around 160,000 per year to around 540,000 per year and Indian visitor arrivals have increased from around 50,000 per year to around 150,000 per year (Chart D).
Chart D: Overseas arrivals
Note: Includes visitors for purposes of education and employment who intend to stay in Australia for less than one year.
Source: ABS cat. no. 3401.0.
The strong growth in Asia is providing strong support for exporters at a time of a high exchange rate and weakness in the advanced economies. These opportunities will continue to expand — for resources companies, high‑end manufacturers, service providers and rural commodity producers — as the Asian Century proceeds.
Imports are forecast to increase strongly over the next two years, underpinned by record levels of import‑intensive investment in the resources sector and the high Australian dollar. The resources investment boom is fuelling significant demand for imports, particularly capital goods imports for the liquefied natural gas sector where around two‑thirds of capital investment is imported. Outside the resources sector, imports of consumption goods and travel services are also expected to record solid growth as consumers continue to take advantage of the high Australian dollar. Total import volumes are forecast to grow 7½ per cent in 2012‑13 and 5½ per cent in 2013‑14.
The terms of trade are likely to have peaked in the September quarter of 2011 and are expected to fall over the next two years as prices for Australia's key commodity exports ease in line with growing world supply (Chart 8). Despite the forecast decline in prices, the terms of trade are expected to remain close to historical highs over the forecast period. The terms of trade are expected to decline gradually over the medium term.
Chart 8: Terms of trade
Source: ABS cat. no. 5206.0 and Treasury.
The prices of Australia's key non‑rural commodity exports experienced significant falls during the financial turmoil in the second half of 2011. However, since then, iron ore and coal prices have been relatively stable (Chart 9).
Strong growth in Asia, particularly China, is expected to continue to support strong demand for iron ore and coal. However, increasing global supply, led by Australia, is expected to weigh on prices over the next two years. Accordingly, despite the continued positive outlook, the terms of trade are forecast to fall 5¾ per cent in 2012‑13 and 3¼ per cent in 2013‑14.
Chart 9: Bulk commodity prices
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 (Chart 10), as the trade balance moves into deficit, driven by declining non‑rural commodity prices and surging import volumes associated with the resources investment boom (Box 7).
Chart 10: Current account balance
Source: ABS cat. no. 5206.0, 5302.0 and Treasury.
Box 7: Resources investment and the current account
The resources boom is driving unprecedented levels of investment in Australia. This is leading to a surge in capital goods imports and an expected temporary widening of the current account deficit. High levels of investment are boosting Australia's production capacity.
Historically, Australia has been a large net importer of capital, running current account deficits for most of its history, driven by our very high investment rates. Both Australia's investment rate and saving rate are high compared with the major advanced economies (Chart A).
Chart A: Gross saving/investment
Note: Australia data refer to financial years beginning 1993‑94. Data for G7 refer to calendar years beginning 1993.
Source: ABS cat. no. 5206.0 IMF and Treasury.
After a temporary GFC‑related decline, resources investment is now growing strongly. As resources investment is highly import‑intensive, imports have also surged, with imports of capital goods more than doubling since the start of the boom (Chart B).
Chart B: Investment and imports
Source: ABS cat. no. 5206.0, 5302.0 and Treasury.
Over the next two years, new business investment and capital imports are expected to reach record highs as a percentage of GDP and the current account deficit is expected to widen (Chart C).
Chart C: The current account
Source: ABS cat. no. 5206.0, 5302.0 and Treasury.
As the boom matures, exports should strengthen in line with the increased productive capacity of the resources sector and capital imports should ease, returning the current account to more normal levels.
Despite ongoing global weakness and uncertainty, Australia's unemployment rate has remained low and stable and is well below rates in most advanced economies. At close to 5 per cent, it is currently half that in Europe and significantly less than in the United States (Box 1). Employment growth has averaged around 1¾ per cent per year over the past three years and over 500,000 jobs have been created.
However global uncertainty, the impact of the high exchange rate, consumer caution, and shifting patterns of demand have all made employers more hesitant to hire new workers. Following strong employment growth in 2010, there was little employment growth in 2011.
Instead, employers have responded to increased labour demand by increasing the average number of hours employees work each week. Had average hours not increased, there would have been around 66,000 additional jobs created in the 12 months to March 2012.
Aggregate employment outcomes conceal the ongoing transition in employment that is occurring at a sectoral level. Resources‑related sectors (such as mining and mining‑related construction) and public, social and some service‑related sectors (such as health care and social assistance, professional, scientific and technical services, and rental, hiring and real estate services) all recorded significant increases in their shares of employment over the past three years. However, other sectors (such as manufacturing, retail trade, and transport, postal and warehousing) recorded substantial declines in their shares over the same period (Chart 11).
Chart 11: Change in employment share — February 2009 to February 2012
Note: This chart shows the five industry categories with the largest increase in employment share over the past three years and the five categories with the largest decrease over the same period.
Source: ABS cat. no. 6291.0.55.003.
With patterns of demand changing and the economy in a long‑term transition, the shift in resources towards the fast‑growing sectors of the economy is likely to continue with solid, albeit weaker, employment growth expected in the services sector and strong employment growth in the rapidly expanding but less labour‑intensive resources and resources‑related sectors over coming years (Chart 12).
Chart 12: Employment share by activity over time
Source: Feinstein (1999), OECD Statistics and Treasury.
The solid growth in the services sector and other sectors benefiting from the resources boom is expected to be partly offset by the continued movement of resources out of some of the labour‑intensive sectors such as retail and manufacturing. Nevertheless, overall employment growth is expected to strengthen, though remain modest. Employment is forecast 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. Over 360,000 jobs are expected to be created over the forecast period. This builds on the more than 750,000 jobs created since late 2007.
The unemployment rate is expected to drift up slightly over coming quarters, in line with the modest growth in employment, reaching 5½ per cent in the June quarters of both 2013 and 2014. However, the uneven pattern of sectoral growth is expected to continue to pose a downside risk to the labour market, with the possibility that frictional unemployment could temporarily rise as businesses adjust to changing patterns of demand and workers look to find new opportunities in emerging parts of the economy.
The labour force participation rate has declined over the past year, falling around ½ of a percentage point, partly reflecting the first baby boomers leaving the workforce. Despite these falls, the national participation rate continues to be high in historical terms, and is expected to remain at around 65¼ per cent over the next two years.
Wages growth stabilised in 2011, with private sector wages growing at a faster rate than public sector wages throughout 2011 (Chart 13). Wages growth is currently below trend, and is expected to remain modest over the next two years in line with the slight rise in the unemployment rate and contained inflation.
The Wage Price Index is expected to grow 3½ per cent through the year to the June quarter of 2012 and by 3¾ per cent through the year to the June quarter of both 2013 and 2014.
Chart 13: Growth in the wage price index
Source: ABS cat. no. 6345.0.
Headline and underlying measures of inflation are expected to remain contained over the next two years, consistent with an economy growing around trend and the relatively stable labour market outlook, notwithstanding the one‑off price increases associated with the introduction of the carbon price on 1 July 2012.
Underlying inflation was moderate during 2011, despite the temporary price rises associated with the natural disasters. Looking ahead, underlying inflation is forecast to be 2 per cent through the year to the June quarter of 2012, and 2¾ per cent through the year to the June quarter of 2013 (including a one‑off carbon price impact of ¼ of a percentage point) before easing to 2½ per cent through the year to the June quarter of 2014.
Headline inflation has eased in recent quarters as the temporary price effects of the 2011 natural disasters have washed out and is expected to be just 1¼ per cent in through‑the‑year terms to the June quarter of 2012. Headline inflation is then expected to rise temporarily to 3¼ per cent in through‑the‑year terms to the June quarter of 2013, (including a one‑off carbon price impact of ¾ of a percentage point) before easing back to 2½ per cent in through‑the‑year terms to the June quarter of 2014 (Chart 14).
Chart 14: Headline and underlying inflation
Note: The underlying inflation measure is the average of the trimmed mean and weighted median.
Source: ABS cat. no. 6401.0 and Treasury.
Box 8: The effect of carbon pricing on the economy
The carbon price modelling, outlined in the update to the Strong growth, low pollution report issued by the Treasury on 21 September 2011, shows the Australian economy will continue to prosper as Australia moves to a clean energy future. It shows that GDP and Gross National Income will continue to grow solidly under the policy.
The forecasts incorporate the impact of the carbon price as outlined in the modelling. The carbon price is not expected to have a material impact on the domestic economic outlook with real GDP growth and employment growth expected to be reduced by less than ¼ of a percentage point in 2012‑13, with no discernible impact on the forecast unemployment rate.
After the initial introduction of the scheme, smaller changes in the carbon price are expected to result in correspondingly smaller impacts on GDP growth in subsequent years.
The carbon price is expected to result in a one‑off 0.7 per cent increase in consumer prices in 2012‑13. Nine out of 10 households will receive assistance to help with the cost of living impact of the carbon price through increases in Government payments and/or tax cuts.
For almost 6 million households the assistance will be sufficient to cover their average expected price impact.
Assistance through Government payments will begin to be delivered with the Clean Energy Advance to be paid in May and June, and tax cuts will take effect from 1 July 2012.
Lower and middle income families typically have higher marginal propensity to consume than high income earners, so the targeted household compensation payments to this group should support aggregate consumption spending. Accordingly, the policy change is expected to have only minimal effects on aggregate household real consumption.
A carbon price is the cheapest and most efficient means of gradually transforming the economy to a clean energy future. It creates incentives for business to invest in clean technology or find smarter, less energy‑intensive way of operating. Around $100 billion of investment in new clean energy sources such as solar, wind and geothermal will be unleashed over the period to 2050.
Nominal GDP is forecast to grow 5 per cent in 2012‑13 and 5¼ per cent in 2013‑14. This reflects the expected decline in the terms of trade over the period, combined with around‑trend real GDP and domestic prices growth (Chart 15). Nominal GDP is distributed throughout the economy mainly as compensation of employees, gross operating surplus and gross mixed income.
Chart 15: Components 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.
Gross operating surplus is forecast to grow 4¾ per cent in 2012‑13 and 5¼ per cent in 2013‑14. Growth is expected to slow from the robust rates experienced over recent years as the softening terms of trade and patchiness in the non‑resources economy weigh on profit growth. Compensation of employees is forecast to grow 5 per cent in 2012‑13 and 5½ per cent in 2013‑14, reflecting the more subdued outlook for wages and employment over the period. The decline in the terms of trade is expected to result in a decline in the profits share (and a corresponding rise in the wages share) of income over the next two years.
Gross mixed income, which includes the wages and profits of farms and other unincorporated enterprises, is forecast to grow 3¼ per cent in 2012‑13 and 4¼ per cent in 2013‑14.
The fiscal aggregates in the Budget are underpinned by a set of forward estimates consisting of short‑term economic forecasts and projections based on medium‑term assumptions.
The economy is projected to operate at capacity over the projection period. Real GDP is projected to grow at its trend rate of around 3 per cent per year over the two projection years of the forward estimates (Chart 16).
Beyond the forward estimates, GDP is projected to grow at around 3 per cent until 2018‑19, when trend growth is projected to slow as population ageing generates a gradually falling participation rate.
The unemployment rate is projected to be 5 per cent over the medium term. This assumption has long been used for medium‑term projections and is near current estimates of the non‑accelerating inflation rate of unemployment.1 Inflation is projected to be 2½ per cent, consistent with the Reserve Bank of Australia's medium‑term target band.
The terms of trade are projected to decline by a total of around 20 per cent over a 15‑year period, settling around their 2006‑07 level. This reflects an expectation that current levels of commodity prices will not be sustained in the longer term, as supply increases gradually bring down prices over time.
The exchange rate is assumed to remain around its recent average level during the forecast period. Over the projection period, the exchange rate is assumed to move in line with the long‑term historical relationship between the terms of trade and the real effective exchange rate. This technical assumption was introduced in the 2011‑12 Budget to provide greater internal consistency during the projection period. The current terms of trade projections imply a fall in the real exchange rate of 0.9 per cent per annum over the projection period.
Chart 16: Real GDP growth over the forward estimates period
Source: ABS cat. no. 5206.0 and Treasury.
1 The Treasury's estimates are based on a methodology detailed in Gruen, Pagan and Thompson (1999), 'The Phillips curve in Australia', Journal of Monetary Economics, and updated in Kennedy, Luu and Goldbloom (2008), 'Examining full employment in Australia using the Phillips and Beveridge Curves', The Australian Economic Review.
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