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Australian Government Coat of Arms

Budget | 2014-15

Budget 2014-15
Australian Government Coat of Arms, Budget 2014-15

Statement 2 (continued)

Outlook for the international economy

The global economic outlook has improved gradually since the end of 2013, led by a pickup in activity in advanced economies. Over the same period, activity has moderated in emerging market economies, although they are still expected to contribute nearly three quarters of global growth over the forecast period, with growth in China remaining solid. The risks are more balanced than previously, though still to the downside. Both advanced and emerging market economies are continuing to deal with legacy issues from the financial crisis. These include adjusting to a tightening of financial conditions as the United States gradually normalises its unconventional monetary policy, and addressing continued high unemployment in many advanced economies.

In 2013, the global economy experienced its most subdued pace of growth since the financial crisis, expanding by around 3 per cent. World GDP growth is expected to gradually pick up towards trend across the forward estimates with growth of 3½ per cent in 2014, and 3¾ per cent in both 2015 and 2016, largely reflecting growing momentum in the recoveries of advanced economies. With diverging conditions across advanced and emerging market economies, a stronger global economy is not expected to be reflected in evenly robust growth across regions and countries.

Forecast growth for Australia's major trading partners has improved slightly to 4¾ per cent over the forecast period, above its trend rate of around 4 per cent. This reflects both the improved outlook in advanced economies and the increasing weight accorded to Australia's fast growing Asian partners.

Table 2: International GDP growth forecasts(a)
  Actuals   Forecasts  
  2013   2014 2015 2016
China(b) 7.7   7 1/4 7 1/4 7
India(b) 4.4   4 3/4 5 1/4 5 1/2
Japan 1.5   1 1/2 1 1
United States 1.9   2 3/4 3 3
Euro area -0.4   1 1 1/2 1 1/2
Other East Asia(c) 4.0   4 1/2 4 1/2 4 3/4
Major trading partners 4.6   4 3/4 4 3/4 4 3/4
World 3.0   3 1/2 3 3/4 3 3/4

(a) World, euro area and other East Asia growth rates are calculated using GDP weights based on purchasing power parity (PPP), while growth rates for major trading partners are calculated using export trade weights.

(b) Production‑based measure of GDP.

(c) Other East Asia comprises the newly industrialised economies (NIEs) of Hong Kong, South Korea, Singapore and Taiwan and the Association of Southeast Asian Nations group of five (ASEAN‑5), which comprises Indonesia, Malaysia, the Philippines, Thailand and Vietnam.

Source: National Statistical Agencies, IMF World Economic Outlook April 2014, Thomson Reuters and Treasury.

While growth in China has moderated, it is still expected to remain solid. The economy grew 7.7 per cent in 2013, slightly above the official target of 7.5 per cent. Consistent with the recent softening in key indicators, growth is expected to moderate to 7¼ per cent in 2014 and 7 per cent by 2016, as the economy adjusts to the inevitable slowdown from the very high rates of credit growth in recent years, and becomes less dependent on investment and more on consumption.

The United States is poised for stronger economic growth over the year ahead, with forecasts of above trend growth. Relatively weak data in early 2014 is expected to reflect the impact of an unusually severe winter and lower inventory levels after significant stockpiling in late 2013. Household consumption has underpinned the recovery to date, with a long‑awaited pickup in business investment expected to provide ongoing momentum. Fiscal headwinds from 2013 have also abated, as has short‑term fiscal uncertainty with the latest budget deal and suspension of the debt ceiling. The United States Federal Reserve is widely expected to continue to reduce asset purchases as conditions strengthen. However, while inflation remains subdued, a tightening of policy (through official interest rate increases) is not expected before 2015.

In Japan, the economy has been boosted by short‑term monetary and fiscal stimulus and a pickup in private demand and prices. Growth is forecast to moderate in the aftermath of the consumption tax hike in April this year, though partially offset by fiscal stimulus. The recovery is forecast to remain relatively subdued given a range of structural constraints on growth — such as a falling working age population and relatively low female labour force participation — and continued fiscal consolidation. A stronger recovery in Japan requires the 'third arrow' of structural reforms to lift productivity and longer‑run growth potential, and the successful achievement of the Bank of Japan's inflation objectives.

Despite the welcome pickup in activity in the euro area, the recovery is forecast to remain weak, uneven and fragile. Euro area GDP growth is expected to strengthen to around 1 per cent supported by accommodative monetary policy, an easing of fiscal headwinds, improved external demand and a more even balance of risks. However, the outlook remains subdued, given continued financial system impairment, an ageing population and the effect of structural rigidities on productivity and employment growth. A more enduring resolution to the euro area design will require challenging reforms, including establishing an effective banking union.

Major ASEAN economies moderated in 2013 on the back of tighter financial conditions, lower commodity prices and structural impediments to growth. However, domestic demand remains resilient and, for the more trade‑exposed economies, an improved global outlook should also support relatively solid growth. India is showing early signs of recovery from a consumption and investment‑led slowdown, although its structural impediments are expected to constrain growth to around 5 to 6 per cent.