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Australian Government Coat of Arms

Budget | 2015-16

Budget 2015-16
Australian Government Coat of Arms, Budget 2015-16

Statement 2 (continued)

Outlook for the domestic economy

Outlook for Real GDP growth

The outlook for the Australian economy remains positive. It is one of the fastest growing economies in the advanced world. The fundamentals are solid with a lower exchange rate, lower petrol and electricity prices, rising household wealth and macroeconomic policy settings working together.

The Australian economy is weathering one of the largest falls in commodity prices in its history, and is still expected to grow by 2¾ per cent in 2015‑16 before increasing further to 3¼ per cent in 2016‑17 (Chart 2). The transition to broader‑based growth is well underway. Household consumption, dwelling investment and exports are all lifting. On the other hand, a sustained recovery in non‑mining business investment is taking longer than expected.

Chart 2: Real GDP growth

This chart shows real GDP growth.

Source: ABS cat. no. 5206.0 and Treasury.

Real GDP growth
X Values Growth through the year 20-year average
1988-89 3.9 3.3
1989-90 3.5 3.3
1990-91 -0.4 3.3
1991-92 0.4 3.3
1992-93 4.0 3.3
1993-94 4.0 3.3
1994-95 3.9 3.3
1995-96 3.9 3.3
1996-97 3.9 3.3
1997-98 4.4 3.3
1998-99 5.0 3.3
1999-00 3.9 3.3
2000-01 1.9 3.3
2001-02 3.9 3.3
2002-03 3.1 3.3
2003-04 4.2 3.3
2004-05 3.2 3.3
2005-06 3.0 3.3
2006-07 3.8 3.3
2007-08 3.7 3.3
2008-09 1.7 3.3
2009-10 2.0 3.3
2010-11 2.3 3.3
2011-12 3.7 3.3
2012-13 2.5 3.3
2013-14 2.5 3.3
2014-15 2.5
2015-16 2.8
2016-17 3.3
2017-18 3.5
2018-19 3.5

Source: ABS cat. no. 5206.0 and Treasury.

Fundamentals are underpinning this transition to broader‑based growth. Interest rates are at historic lows with the official cash rate reduced by 275 basis points since the peak in the terms of trade in the September quarter 2011. However, they remain above near zero interest rates in most of the major advanced economies, consistent with the relative strength of the Australian economy (Table 3). This is in contrast to the Reserve Bank of Australia's emergency response to the global financial crisis, when Australia's official cash rate was reduced by 425 basis points over a period of 8 months to avoid Australia following other major advanced economies into recession.

Table 3: Global interest rates
  Policy rate
Australia 2.00
United States 0.13
Canada 0.75
Switzerland -0.75
United Kingdom 0.50
Sweden -0.25
Euro area 0.05
Japan 0.10

Note: Switzerland policy rate is the midpoint of the 3‑month LIBOR target band.

Source: Central Banks and Bloomberg.

The Australian dollar has declined since September last year, providing support for export‑oriented and import‑competing firms. Oil prices have also fallen since the 2014‑15 Budget, boosting households' spending power and reducing costs for businesses. Electricity prices are down on average 3.9 per cent compared with one year ago, after a record fall of 5.1 per cent in the September quarter 2014 following the abolition of the carbon tax.

Low interest rates are supporting households

Low interest rates are supporting the Australian economy's transition to broader‑based growth at a time when household demand is strengthening. The dwellings sector has contributed strongly to recent growth. Housing construction is responding positively to accommodative monetary policy, strong growth in house prices as well as solid population growth. A significant pipeline of approvals suggests that the upswing in dwelling investment still has some way to run and growth is forecast to be 6½ per cent in 2015‑16 and 4½ per cent in 2016‑17.

Buoyant conditions in the housing market are also supporting household consumption, increasing both household wealth and spending on household furnishings. Weaker oil prices have also improved household budgets with recent retail fuel prices down by over 14 per cent or 22 cents per litre since the 2014‑15 Budget. These factors, along with rising equity prices and lower electricity prices, helped household consumption to grow at its fastest rate in nearly three years in the December quarter 2014.

Household consumption has also been supported by a modest fall in the household saving ratio. Savings rose strongly during the period of rapid household income growth that accompanied the terms of trade boom and following the financial crisis. There are signs that households are now smoothing their consumption as the terms of trade decline. The household saving ratio is forecast to continue to fall but only by a modest amount, and is expected to remain well above pre‑crisis lows.

Household consumption is forecast to rise by 3 per cent in 2015‑16 and 3¼ per cent in 2016‑17. The extent to which the household saving ratio will fall to support consumption growth is a key risk surrounding this outlook.

A lower exchange rate is making Australian businesses more competitive

As commodity prices have fallen sharply, the exchange rate has also started to fall (see Box 2). The fall in the exchange rate combined with subdued wage growth will facilitate the economy's adjustment to the fall in commodity prices and is encouraging export growth in sectors such as tourism and education.

Growth in our region is also expected to support tourism. Tourists from China accounted for over one quarter of the growth in travel services spending in 2013‑14. There were over 760,000 Chinese visitor arrivals in that year alone spending around $6.5 billion or $8,600 per visitor, providing support for businesses in sectors such as retail and accommodation and food services (Chart 3).

Chart 3: China overseas visitor arrivals (persons monthly)

This chart/box shows China overseas visitor arrivals (persons monthly).

Source: ABS cat no. 3401.0.

Website chart data has not been prepared correctly - see Mary-Ann/Liam

Total exports are expected to increase by 5 per cent in 2015‑16 and 6½ per cent in 2016‑17. Exports of non‑rural commodities continue to grow strongly as the investment phase of the mining boom nears completion and production increases. The volume of iron ore exports has doubled over the past 5 years and is expected to increase by a further 8 per cent by the end of 2016‑17 as mine expansions already underway are completed (Chart 4).

Significant investments in LNG are still under development and will make a strong contribution to export growth in coming years. Exports of LNG are set to nearly double over the forecast period as major projects in Western Australia, Queensland and the Northern Territory enter into their production phases. By the end of the decade, Australia is set to overtake Qatar as the largest exporter of LNG in the world.

Box 2: The export benefits of a lower exchange rate

The exchange rate depreciation is providing opportunities for export growth in industries that struggled under the weight of the high Australian dollar during the resources boom. Services and manufacturing exports are, in particular, forecast to increase at a solid rate over the next couple of years (Chart A).

Australia's real exchange rate appreciated by around 30 per cent during the terms of trade boom, and has subsequently depreciated by 13 per cent since the peak in the terms of trade in September quarter 2011 (Chart B).3 The exchange rate has played an important role in smoothing the adjustment of the real economy to the terms of trade shock and keeping inflation contained.

Box 2: Chart A: Service and Manufactured Export Volumes

This chart/box shows Service and Manufactured Export Volumes.

Note: 2012‑13 prices; forecast period is from March 2015 to June 2017.

ABS cat. no. 5302.0 and Treasury.

Service and Manufactured Export Volumes
Service export volumes Manufactured export volumes
Jun-96 8.6 3.8
Sep-96 8.6 3.8
Dec-96 9.1 4.2
Mar-97 8.9 4.1
Jun-97 9.1 4.9
Sep-97 9.3 4.6
Dec-97 9.1 4.4
Mar-98 9.2 4.2
Jun-98 9.4 4.5
Sep-98 9.6 4.1
Dec-98 9.7 4.3
Mar-99 9.6 4.5
Jun-99 10.0 4.5
Sep-99 10.0 4.8
Dec-99 10.2 5.3
Mar-00 10.5 5.1
Jun-00 10.9 5.2
Sep-00 13.1 5.4
Dec-00 11.5 5.5
Mar-01 11.7 6.0
Jun-01 11.8 5.7
Sep-01 11.7 5.5
Dec-01 10.8 5.7
Mar-02 11.3 5.9
Jun-02 11.4 5.7
Sep-02 11.2 5.7
Dec-02 11.8 6.1
Mar-03 11.4 6.0
Jun-03 10.7 5.9
Sep-03 11.3 6.0
Dec-03 11.9 5.9
Mar-04 11.4 6.0
Jun-04 11.7 6.1
Sep-04 11.6 5.9
Dec-04 11.8 6.1
Mar-05 12.0 6.2
Jun-05 11.9 6.6
Sep-05 12.1 6.5
Dec-05 12.1 6.5
Mar-06 12.4 6.6
Jun-06 12.7 6.6
Sep-06 12.9 6.6
Dec-06 13.3 6.7
Mar-07 13.7 7.0
Jun-07 13.8 7.1
Sep-07 13.8 7.5
Dec-07 13.7 7.4
Mar-08 14.2 7.6
Jun-08 14.2 8.1
Sep-08 13.9 7.8
Dec-08 14.4 7.4
Mar-09 14.3 6.7
Jun-09 13.8 6.4
Sep-09 13.5 6.8
Dec-09 13.5 7.0
Mar-10 13.3 7.1
Jun-10 13.5 7.0
Sep-10 13.6 6.9
Dec-10 13.4 7.3
Mar-11 13.1 7.2
Jun-11 13.3 7.3
Sep-11 13.2 7.4
Dec-11 13.1 7.3
Mar-12 13.2 7.5
Jun-12 13.2 7.6
Sep-12 13.1 7.5
Dec-12 13.3 7.2
Mar-13 13.6 7.2
Jun-13 13.5 7.2
Sep-13 13.6 7.3
Dec-13 14.0 7.4
Mar-14 14.1 7.2
Jun-14 14.1 7.4
Sep-14 14.6 7.4
Dec-14 14.3 7.3
Mar-15 14.5 7.4
Jun-15 14.6 7.4
Sep-15 14.9 7.5
Dec-15 15.2 7.6
Mar-16 15.4 7.6
Jun-16 15.7 7.7
Sep-16 15.9 7.7
Dec-16 16.0 7.8
Mar-17 16.2 7.8
Jun-17 16.4 7.9

Note: 2012‑13 prices; forecast period is from March 2015 to June 2017.

ABS cat. no. 5302.0 and Treasury.

Box 2: Chart B: Exchange Rate and Terms of Trade

This chart shows the Australian dollar real trade-weighted exchange rate and the terms of trade between 1984 and 2014.

Note: Index 2012‑13 average = 100.

Source: ABS cat. no. 5206.0 and RBA.

Exchange Rate and Terms of Trade
X Values Terms of trade Australian dollar real trade-weighted exchange rate
Mar-85 58.70 75.49
Jun-85 55.10 66.67
Sep-85 54.40 68.90
Dec-85 52.00 64.95
Mar-86 51.80 64.90
Jun-86 51.80 64.22
Sep-86 49.40 55.62
Dec-86 49.30 58.84
Mar-87 49.60 59.96
Jun-87 50.70 62.21
Sep-87 52.00 63.38
Dec-87 52.10 60.51
Mar-88 54.70 61.01
Jun-88 57.10 65.85
Sep-88 60.30 70.77
Dec-88 60.60 72.34
Mar-89 63.40 74.19
Jun-89 63.00 70.15
Sep-89 61.90 70.13
Dec-89 62.10 71.93
Mar-90 62.00 71.46
Jun-90 62.30 72.61
Sep-90 61.60 74.05
Dec-90 58.70 69.42
Mar-91 57.80 69.87
Jun-91 57.30 71.54
Sep-91 57.60 72.67
Dec-91 57.00 70.71
Mar-92 57.10 67.62
Jun-92 56.70 67.87
Sep-92 55.60 63.58
Dec-92 54.90 61.96
Mar-93 55.00 61.85
Jun-93 53.40 60.05
Sep-93 53.00 57.82
Dec-93 52.80 57.85
Mar-94 53.50 62.35
Jun-94 53.30 62.27
Sep-94 53.60 62.00
Dec-94 55.50 62.77
Mar-95 55.80 61.23
Jun-95 55.10 56.79
Sep-95 55.40 59.98
Dec-95 56.00 61.71
Mar-96 56.80 63.14
Jun-96 58.00 66.28
Sep-96 58.10 66.26
Dec-96 58.20 67.27
Mar-97 58.40 68.01
Jun-97 58.80 67.32
Sep-97 58.80 65.80
Dec-97 58.50 65.97
Mar-98 57.50 68.31
Jun-98 57.30 64.59
Sep-98 55.50 62.52
Dec-98 54.80 60.71
Mar-99 55.40 62.11
Jun-99 55.10 65.01
Sep-99 55.90 64.59
Dec-99 56.90 62.98
Mar-00 58.80 62.82
Jun-00 57.80 59.66
Sep-00 58.60 59.42
Dec-00 58.30 56.53
Mar-01 58.40 57.40
Jun-01 58.10 57.03
Sep-01 58.90 56.96
Dec-01 58.70 57.44
Mar-02 60.00 59.43
Jun-02 59.30 61.51
Sep-02 59.40 59.59
Dec-02 59.90 60.96
Mar-03 60.50 63.41
Jun-03 60.70 67.51
Sep-03 61.90 69.45
Dec-03 63.20 73.36
Mar-04 65.50 77.11
Jun-04 67.40 73.25
Sep-04 68.10 72.62
Dec-04 68.80 75.49
Mar-05 70.80 76.84
Jun-05 75.40 77.13
Sep-05 76.60 77.79
Dec-05 77.80 77.27
Mar-06 78.90 76.37
Jun-06 80.30 76.26
Sep-06 81.80 77.51
Dec-06 83.50 78.27
Mar-07 85.00 79.56
Jun-07 85.50 83.22
Sep-07 85.30 84.28
Dec-07 86.00 86.63
Mar-08 87.40 86.53
Jun-08 96.20 89.32
Sep-08 103.00 86.42
Dec-08 100.20 69.36
Mar-09 93.40 70.28
Jun-09 85.50 78.78
Sep-09 84.20 84.31
Dec-09 87.10 90.01
Mar-10 91.20 90.89
Jun-10 103.70 89.89
Sep-10 105.50 90.39
Dec-10 107.30 95.51
Mar-11 112.30 96.67
Jun-11 116.80 100.16
Sep-11 118.50 98.02
Dec-11 112.20 96.70
Mar-12 106.50 100.69
Jun-12 106.00 97.44
Sep-12 101.10 100.61
Dec-12 98.90 99.53
Mar-13 99.70 101.37
Jun-13 100.00 98.48
Sep-13 98.10 91.96
Dec-13 98.50 92.79
Mar-14 96.40 90.48
Jun-14 92.70 93.83
Sep-14 89.40 93.50
Dec-14 87.90 89.63
Mar-15 85.57

Note: Index 2012‑13 average = 100.

Source: ABS cat. no. 5206.0 and RBA.

One industry that is already benefiting from a lower dollar is tourism. Real travel expenditure by international visitors to Australia has increased by 11 per cent since the start of 2012, whereas real travel expenditure by Australian residents travelling abroad has decreased by 11 per cent. Overall, this has contributed to a sharp improvement in the trade balance of tourism‑related services (Chart C). The recent strength in travel service exports has been broad‑based across all states and territories.

The depreciation of the exchange rate is also expected to boost manufactured exports. Australia's manufacturing sector has been facing increased competition from lower cost producers in Asia for some time now.

Even during this period of strong competition and the high Australian dollar, some manufacturing industry sectors performed relatively well, namely producers of medium‑to‑high skilled and technology‑intensive goods such as pharmaceuticals, professional and scientific equipment, and machinery and transport equipment (Chart D). The depreciation of the exchange rate and a recovery in global demand should support growth in these industries.

Box 2: Chart C: Tourism - related services trade balance

This chart shows the relationship between the Australian nominal trade-weighted index and tourism-related services trade balance. There has been a sharp improvement in the trade balance of tourism-related services over the past 18 months, consistent with the depreciation of the Australian dollar.

Note: Tourism‑related services include travel services and passenger transportation services; exchange rate index March 1970 = 100.

Source: ABS cat. no. 5368.0 and RBA.

Tourism - related services trade balance
X Values Australian dollar TWI (RHS; inverted scale) Tourism-related services trade balance (trend, LHS)
Mar-1985 69.20 -139.00
Apr-1985 64.20 -140.00
May-1985 64.80 -141.00
Jun-1985 65.00 -140.00
Jul-1985 68.50 -135.00
Aug-1985 66.40 -130.00
Sep-1985 64.80 -122.00
Oct-1985 63.40 -114.00
Nov-1985 60.90 -104.00
Dec-1985 60.70 -96.00
Jan-1986 62.70 -88.00
Feb-1986 59.80 -82.00
Mar-1986 61.10 -78.00
Apr-1986 61.40 -79.00
May-1986 60.70 -83.00
Jun-1986 56.30 -88.00
Jul-1986 49.30 -90.00
Aug-1986 50.30 -87.00
Sep-1986 51.90 -78.00
Oct-1986 54.00 -63.00
Nov-1986 54.30 -48.00
Dec-1986 55.00 -35.00
Jan-1987 52.80 -26.00
Feb-1987 54.10 -21.00
Mar-1987 55.40 -22.00
Apr-1987 54.50 -24.00
May-1987 55.80 -29.00
Jun-1987 56.60 -34.00
Jul-1987 55.30 -40.00
Aug-1987 55.20 -41.00
Sep-1987 56.20 -40.00
Oct-1987 51.70 -33.00
Nov-1987 52.30 -22.00
Dec-1987 52.00 -9.00
Jan-1988 52.50 6.00
Feb-1988 53.10 22.00
Mar-1988 53.80 41.00
Apr-1988 55.20 60.00
May-1988 58.90 80.00
Jun-1988 59.80 100.00
Jul-1988 61.00 113.00
Aug-1988 61.80 118.00
Sep-1988 60.00 109.00
Oct-1988 61.10 87.00
Nov-1988 63.70 57.00
Dec-1988 63.20 21.00
Jan-1989 66.70 -15.00
Feb-1989 59.60 -46.00
Mar-1989 62.20 -68.00
Apr-1989 60.00 -81.00
May-1989 58.80 -89.00
Jun-1989 59.40 -92.00
Jul-1989 57.80 -95.00
Aug-1989 60.00 -100.00
Sep-1989 59.80 -105.00
Oct-1989 60.70 -110.00
Nov-1989 60.40 -112.00
Dec-1989 61.10 -108.00
Jan-1990 59.40 -97.00
Feb-1990 59.00 -82.00
Mar-1990 59.80 -68.00
Apr-1990 59.60 -59.00
May-1990 60.20 -56.00
Jun-1990 61.60 -56.00
Jul-1990 60.40 -56.00
Aug-1990 61.40 -53.00
Sep-1990 61.60 -42.00
Oct-1990 57.20 -24.00
Nov-1990 56.90 -3.00
Dec-1990 57.30 15.00
Jan-1991 57.50 26.00
Feb-1991 57.90 29.00
Mar-1991 59.70 24.00
Apr-1991 60.20 15.00
May-1991 58.50 9.00
Jun-1991 59.70 9.00
Jul-1991 60.10 17.00
Aug-1991 60.50 29.00
Sep-1991 60.60 41.00
Oct-1991 59.30 48.00
Nov-1991 59.00 53.00
Dec-1991 55.90 55.00
Jan-1992 55.80 54.00
Feb-1992 56.80 51.00
Mar-1992 58.60 47.00
Apr-1992 57.90 43.00
May-1992 56.90 37.00
Jun-1992 55.20 36.00
Jul-1992 54.70 40.00
Aug-1992 51.60 51.00
Sep-1992 51.70 65.00
Oct-1992 51.90 83.00
Nov-1992 51.80 102.00
Dec-1992 52.40 122.00
Jan-1993 51.60 144.00
Feb-1993 52.70 163.00
Mar-1993 52.90 177.00
Apr-1993 52.30 186.00
May-1993 49.40 191.00
Jun-1993 49.50 195.00
Jul-1993 50.90 202.00
Aug-1993 49.30 217.00
Sep-1993 47.30 235.00
Oct-1993 49.40 251.00
Nov-1993 49.10 261.00
Dec-1993 50.80 263.00
Jan-1994 54.00 259.00
Feb-1994 53.60 250.00
Mar-1994 52.10 244.00
Apr-1994 52.60 240.00
May-1994 54.60 240.00
Jun-1994 53.00 245.00
Jul-1994 53.90 256.00
Aug-1994 53.90 273.00
Sep-1994 53.40 290.00
Oct-1994 53.10 303.00
Nov-1994 55.50 308.00
Dec-1994 56.20 308.00
Jan-1995 54.50 305.00
Feb-1995 52.90 303.00
Mar-1995 50.70 305.00
Apr-1995 49.60 313.00
May-1995 48.50 323.00
Jun-1995 48.40 330.00
Jul-1995 51.00 330.00
Aug-1995 53.90 323.00
Sep-1995 53.80 315.00
Oct-1995 54.30 309.00
Nov-1995 53.80 308.00
Dec-1995 53.90 313.00
Jan-1996 54.70 325.00
Feb-1996 55.50 343.00
Mar-1996 56.80 360.00
Apr-1996 57.10 374.00
May-1996 58.70 382.00
Jun-1996 58.10 383.00
Jul-1996 56.50 376.00
Aug-1996 57.90 364.00
Sep-1996 58.50 353.00
Oct-1996 58.60 343.00
Nov-1996 59.90 338.00
Dec-1996 59.40 337.00
Jan-1997 58.10 336.00
Feb-1997 59.30 336.00
Mar-1997 60.50 341.00
Apr-1997 60.70 346.00
May-1997 58.00 351.00
Jun-1997 56.70 353.00
Jul-1997 58.30 347.00
Aug-1997 58.20 334.00
Sep-1997 57.70 316.00
Oct-1997 57.10 296.00
Nov-1997 57.00 278.00
Dec-1997 58.10 265.00
Jan-1998 61.90 256.00
Feb-1998 60.60 249.00
Mar-1998 59.60 243.00
Apr-1998 58.00 242.00
May-1998 57.50 241.00
Jun-1998 57.90 240.00
Jul-1998 57.30 240.00
Aug-1998 53.40 239.00
Sep-1998 54.50 240.00
Oct-1998 54.20 244.00
Nov-1998 55.60 253.00
Dec-1998 53.00 267.00
Jan-1999 54.80 285.00
Feb-1999 55.40 302.00
Mar-1999 56.10 319.00
Apr-1999 58.30 332.00
May-1999 58.00 344.00
Jun-1999 58.40 353.00
Jul-1999 57.10 360.00
Aug-1999 56.00 365.00
Sep-1999 57.00 364.00
Oct-1999 55.70 361.00
Nov-1999 55.30 358.00
Dec-1999 56.40 352.00
Jan-2000 56.00 343.00
Feb-2000 54.50 335.00
Mar-2000 53.10 326.00
Apr-2000 52.50 321.00
May-2000 51.40 319.00
Jun-2000 53.30 321.00
Jul-2000 52.70 321.00
Aug-2000 52.20 321.00
Sep-2000 49.90 320.00
Oct-2000 48.20 322.00
Nov-2000 49.20 327.00
Dec-2000 51.60 343.00
Jan-2001 51.10 368.00
Feb-2001 49.30 402.00
Mar-2001 47.40 439.00
Apr-2001 49.20 474.00
May-2001 49.30 502.00
Jun-2001 49.70 521.00
Jul-2001 48.80 531.00
Aug-2001 50.40 533.00
Sep-2001 47.00 529.00
Oct-2001 48.70 527.00
Nov-2001 50.40 529.00
Dec-2001 50.20 538.00
Jan-2002 50.20 553.00
Feb-2002 51.10 565.00
Mar-2002 52.20 569.00
Apr-2002 52.10 561.00
May-2002 53.50 544.00
Jun-2002 52.30 523.00
Jul-2002 50.90 511.00
Aug-2002 51.30 509.00
Sep-2002 50.90 520.00
Oct-2002 51.80 535.00
Nov-2002 52.20 550.00
Dec-2002 51.70 559.00
Jan-2003 53.20 561.00
Feb-2003 54.70 560.00
Mar-2003 54.80 560.00
Apr-2003 56.10 559.00
May-2003 57.70 556.00
Jun-2003 59.40 557.00
Jul-2003 58.30 561.00
Aug-2003 57.30 565.00
Sep-2003 59.10 564.00
Oct-2003 61.00 551.00
Nov-2003 62.10 522.00
Dec-2003 63.50 477.00
Jan-2004 64.50 429.00
Feb-2004 65.20 388.00
Mar-2004 63.80 367.00
Apr-2004 62.10 366.00
May-2004 61.10 378.00
Jun-2004 59.10 394.00
Jul-2004 60.20 402.00
Aug-2004 60.10 398.00
Sep-2004 61.00 386.00
Oct-2004 62.50 372.00
Nov-2004 63.60 359.00
Dec-2004 63.20 354.00
Jan-2005 63.50 359.00
Feb-2005 64.40 369.00
Mar-2005 63.80 381.00
Apr-2005 64.10 393.00
May-2005 63.20 401.00
Jun-2005 64.50 406.00
Jul-2005 64.30 410.00
Aug-2005 63.30 410.00
Sep-2005 64.70 408.00
Oct-2005 63.90 400.00
Nov-2005 63.70 389.00
Dec-2005 62.70 374.00
Jan-2006 63.40 357.00
Feb-2006 62.60 338.00
Mar-2006 60.80 322.00
Apr-2006 62.80 310.00
May-2006 63.20 309.00
Jun-2006 62.20 316.00
Jul-2006 63.90 331.00
Aug-2006 63.70 350.00
Sep-2006 62.60 368.00
Oct-2006 64.00 381.00
Nov-2006 64.50 389.00
Dec-2006 64.90 390.00
Jan-2007 63.80 384.00
Feb-2007 64.60 377.00
Mar-2007 65.90 367.00
Apr-2007 67.00 360.00
May-2007 67.00 353.00
Jun-2007 68.90 344.00
Jul-2007 68.80 330.00
Aug-2007 66.20 308.00
Sep-2007 70.00 277.00
Oct-2007 72.20 240.00
Nov-2007 68.90 204.00
Dec-2007 68.70 176.00
Jan-2008 68.30 157.00
Feb-2008 71.80 146.00
Mar-2008 68.90 145.00
Apr-2008 70.70 143.00
May-2008 72.80 136.00
Jun-2008 73.40 124.00
Jul-2008 72.20 112.00
Aug-2008 67.70 118.00
Sep-2008 63.40 150.00
Oct-2008 54.70 211.00
Nov-2008 54.60 289.00
Dec-2008 55.60 371.00
Jan-2009 53.20 443.00
Feb-2009 54.80 493.00
Mar-2009 57.40 511.00
Apr-2009 59.70 512.00
May-2009 63.30 505.00
Jun-2009 64.70 494.00
Jul-2009 65.70 478.00
Aug-2009 66.30 459.00
Sep-2009 68.20 437.00
Oct-2009 70.70 419.00
Nov-2009 69.90 405.00
Dec-2009 69.70 398.00
Jan-2010 69.20 394.00
Feb-2010 69.50 393.00
Mar-2010 71.70 393.00
Apr-2010 72.50 385.00
May-2010 67.50 369.00
Jun-2010 67.30 350.00
Jul-2010 69.40 328.00
Aug-2010 69.00 304.00
Sep-2010 72.90 272.00
Oct-2010 72.70 234.00
Nov-2010 73.00 198.00
Dec-2010 75.80 161.00
Jan-2011 74.00 129.00
Feb-2011 75.50 105.00
Mar-2011 76.30 89.00
Apr-2011 78.90 77.00
May-2011 77.80 66.00
Jun-2011 77.80 58.00
Jul-2011 78.40 54.00
Aug-2011 76.50 54.00
Sep-2011 72.40 51.00
Oct-2011 76.90 35.00
Nov-2011 74.60 6.00
Dec-2011 75.80 -23.00
Jan-2012 77.90 -45.00
Feb-2012 79.20 -54.00
Mar-2012 76.90 -49.00
Apr-2012 77.00 -33.00
May-2012 73.60 -16.00
Jun-2012 76.50 -10.00
Jul-2012 78.90 -19.00
Aug-2012 77.00 -39.00
Sep-2012 76.90 -60.00
Oct-2012 76.50 -75.00
Nov-2012 77.20 -88.00
Dec-2012 77.10 -101.00
Jan-2013 77.70 -115.00
Feb-2013 77.40 -132.00
Mar-2013 79.10 -151.00
Apr-2013 78.40 -172.00
May-2013 74.00 -187.00
Jun-2013 71.40 -195.00
Jul-2013 69.40 -191.00
Aug-2013 69.20 -177.00
Sep-2013 71.20 -156.00
Oct-2013 72.10 -124.00
Nov-2013 69.80 -83.00
Dec-2013 68.90 -37.00
Jan-2014 67.70 10.00
Feb-2014 68.90 54.00
Mar-2014 71.00 93.00
Apr-2014 71.40 128.00
May-2014 71.50 163.00
Jun-2014 72.00 200.00
Jul-2014 71.50 239.00
Aug-2014 71.90 280.00
Sep-2014 68.90 320.00
Oct-2014 69.40 359.00
Nov-2014 68.20 395.00
Dec-2014 66.50 433.00
Jan-2015 63.90 468.00
Feb-2015 64.10 500.00
Mar-2015 63.30 523.00

Note: Tourism‑related services include travel services and passenger transportation services; exchange rate index March 1970 = 100.

Source: ABS cat. no. 5368.0 and RBA.

Box 2: Chart D: Manufacturing export volumes

This chart shows manufacturing export volumes disaggregated into three categories: high-skilled and technology-intensive; medium-skilled and technology-intensive; and low-skilled and labour-intensive. Some pockets of the manufacturing industry performed relatively well in the decade leading up to the global financial crisis, namely producers of medium-to-high skilled and technology-intensive goods such as pharmaceuticals and specialised machinery & transport equipment.

Note: 2012‑13 prices; manufacturing classifications are based on UNCTADstat definitions; excludes food, beverage, iron and steel manufacturing exports.

Sources: ABS cat. no. 5302.0, Treasury and UNCTADstat..

Manufacturing export volumes
X Values High-skilled and technology-intensive Medium-skilled and technology-intensive Low-skilled and labour-intensive
1986 1.95 2.15 1.95
1987 2.45 2.69 2.21
1988 2.71 2.55 2.00
1989 2.98 2.96 2.55
1990 3.10 3.55 2.80
1991 4.67 3.99 3.50
1992 4.37 4.50 3.80
1993 4.90 5.18 3.81
1994 5.28 5.54 4.83
1995 6.31 6.54 4.63
1996 6.73 7.28 5.35
1997 8.44 7.71 5.79
1998 7.50 7.25 5.20
1999 8.41 7.88 5.91
2000 9.09 9.05 6.01
2001 9.45 10.25 5.87
2002 9.74 9.92 5.82
2003 9.75 10.25 5.60
2004 9.26 10.91 5.38
2005 10.33 11.54 5.31
2006 11.22 11.28 4.96
2007 13.10 12.19 4.62
2008 14.23 13.03 4.17
2009 13.46 9.95 3.87
2010 13.83 11.01 3.83
2011 13.94 11.73 3.52
2012 14.03 12.36 3.45
2013 13.61 11.90 3.64
2014 14.05 11.45 3.73

Note: 2012‑13 prices; manufacturing classifications are based on UNCTADstat definitions; excludes food, beverage, iron and steel manufacturing exports.

Sources: ABS cat. no. 5302.0, Treasury and UNCTADstat..

Recent domestic policy changes and the expanding middle class in Asia will also reinforce the benefit of the lower Australian dollar for other exports such as rural goods and education services.

Education exports will be boosted by changes to student visa policy arrangements. The Department of Immigration and Border Protection is forecasting net international student migration to increase from 88,200 in 2014 to 139,300 in 2017‑18, following the introduction of new visa streamlining measures and post‑study work arrangements.

Free Trade Agreements with Korea, Japan and China will also improve Australia's competitiveness across a range of agricultural exports. Australian services exporters will also gain improved access to Chinese markets, for example, for financial, legal, education and tourism services.

Following strong growth in recent years, rural exports are expected to moderate in 2015‑16. Wheat exports are expected to fall after record highs in crop production over the past two years which were underpinned by favourable weather conditions. Beef exports are also expected to be lower, in part due to farmers rebuilding their herds following past drought conditions.

Chart 4: Export volumes

This charts shows key commodity export volumes on an annual constant price basis from 2006‑07 to 2016‑17.

Note: 2012‑13 prices.

Source: Department of Industry.

Export volumes
X Values Iron ore Metallurgical coal Thermal coal LNG
2006-07 27867.33 19310.89 9938.92 8646.21
2007-08 31876.52 19871.70 10290.78 8224.25
2008-09 35073.67 18146.77 12232.53 9304.19
2009-10 42118.27 22882.76 12018.84 10715.88
2010-11 44060.38 20510.77 12787.16 12036.37
2011-12 50909.12 20630.89 14105.41 11602.08
2012-13 57100.73 22413.29 16160.15 14310.43
2013-14 70666.10 26141.09 17327.53 14168.56
2014-15 81966.94 27505.56 18734.78 14648.85
2015-16 83771.16 27714.56 18132.67 22753.74
2016-17 88247.53 29105.34 18235.63 34460.81
2017-18 91722.33 29643.60 18966.54 43100.34
2018-19 94343.47 30266.44 19109.22 44594.36
2019-20 95332.61 30776.03 19805.62 44620.58

Note: 2012‑13 prices.

Source: Department of Industry.

The transition underway in the economy is also having an impact on imports. The fall in the Australian dollar is expected to encourage consumers and businesses to switch from imported goods and services to domestically produced ones. The end of the investment phase of the resources boom will also lead to a reduction in capital imports in coming years. Imports are forecast to fall by 1½ per cent in 2015‑16 but grow by 2½ per cent in 2016‑17 as GDP growth returns to trend.

Investment is still rebalancing from mining to non‑mining

The most significant revision to real GDP growth in 2015‑16 since the 2014‑15 Budget is business investment. Non‑mining business investment grew solidly in 2014, particularly in the services sector. Despite this, business liaison, the latest ABS Private New Capital Expenditure and Expected Expenditure (CAPEX) and non‑residential building approvals data all suggest that firms in the non‑mining sectors of the economy are yet to commit to significant additional investment in 2015‑16 (Chart 5).

However, conditions are expected to support a lift in non‑mining business investment. Healthy corporate balance sheets along with the lower interest rates, the lower Australian dollar and lower fuel costs should encourage investment plans going forward as firms rebuild and modernise their capital stocks. Reflecting this, real non‑mining business investment is expected to grow by 4 per cent in 2015‑16 and strengthen further to 7½ per cent in 2016‑17.

Chart 5: Nominal non‑mining CAPEX

This chart shows the nominal level of annual non-mining capital expenditure, comprising expenditure on both buildings and structures and equipment, plant and machinery. The series covers actual expenditure from 2002‑03 to 2013‑14, and expected expenditure for 2014‑15 and 2015‑16. Total actual expenditure in 2013‑14 was $67.6 billion. Total expected expenditure in 2014‑15 is $72.6 billion, falling to $67.4 billion in 2015‑16.

Note: Estimates for 2014‑15 and 2015‑16 are based on survey respondents' expectations and have been adjusted using long‑run realisation ratios.

Source: ABS cat. no. 5625.0 and Treasury.

Nominal non‑mining CAPEX
$billion Buildings and Structures Equipment, plant and machinery
1987-88 9.0 16.1
1988-89 11.3 18.1
1989-90 11.8 18.7
1990-91 10.7 17.1
1991-92 7.0 15.7
1992-93 5.7 17.9
1993-94 5.6 20.7
1994-95 6.1 25.4
1995-96 9.4 26.3
1996-97 11.3 27.3
1997-98 9.7 29.1
1998-99 9.9 30.8
1999-00 11.2 32.1
2000-01 9.4 32.2
2001-02 8.1 33.4
2002-03 9.6 37.6
2003-04 12.2 35.4
2004-05 15.0 38.6
2005-06 17.9 43
2006-07 20.7 43.1
2007-08 23.6 44
2008-09 27.5 47.7
2009-10 25.4 46.5
2010-11 29.2 43.3
2011-12 29.8 43
2012-13 24.2 41.6
2013-14 25.9 41.7
2014-15 29.0 43.6
2015-16 28.5 38.9

Note: Estimates for 2014‑15 and 2015‑16 are based on survey respondents' expectations and have been adjusted using long‑run realisation ratios.

Source: ABS cat. no. 5625.0 and Treasury.

Chart 6: Non-mining capacity utilisation

Chart 6: Non‑mining capacity utilisation.

Note: NAB.

Non‑mining capacity utilisation
Date Non-mining capacity utilisation Average since June 2000
Mar-11 81.5 81.4
Jun-11 81.4 81.4
Sep-11 80.7 81.4
Dec-11 81.3 81.4
Mar-12 81.0 81.4
Jun-12 80.5 81.4
Sep-12 80.7 81.4
Dec-12 79.5 81.4
Mar-13 80.4 81.4
Jun-13 79.9 81.4
Sep-13 80.1 81.4
Dec-13 80.4 81.4
Mar-14 80.2 81.4
Jun-14 80.4 81.4
Sep-14 80.7 81.4
Dec-14 80.7 81.4
Mar-15 81.0 81.4

Note: NAB.

The pace and timing of the recovery in non‑mining business investment remains a major source of uncertainty. Bearing that in mind, the Budget forecasts suggest that household and overseas demand will encourage a lift in business confidence and investment, and recognise that the CAPEX survey is a less reliable guide of investment in the non‑mining economy.

It is possible that conditions could improve more rapidly than expected if households increase their spending more rapidly, with businesses responding by ramping up investment. With interest rates at historic lows and rising capacity utilisation, there is some upside risk to the forecasts, particularly in 2016‑17, if a stronger bounce‑back were to materialise (Chart 6). However, if demand and confidence fail to lift, there is a risk that the recovery in non‑mining business investment could be further delayed.

Mining investment is expected to decline further as current projects are completed and few new projects are commissioned. Resources companies are also continuing with their productivity drives to use their capital more efficiently which along with a decline in exploration expenditure is expected to weigh further on mining investment. Mining investment is forecast to fall by 25½ per cent in 2015‑16 and 30½ per cent in 2016‑17, detracting around 4 percentage points from GDP growth over the three years to 2016‑17.

Public final demand, which captures the direct economic impact of consumption and investment across all levels of government, is forecast to grow modestly as governments remain focused on budget consolidation. As a result, public final demand is forecast to rise by 1½ per cent in both 2015‑16 and 2016‑17.

Employment is growing steadily

As the economy has continued to transition to broader‑based growth, the labour market has been resilient. Since the 2014‑15 Budget, employment growth has picked up to 1.5 per cent. The unemployment rate has remained steady at around 6.2 per cent since the middle of last year. The sectors experiencing the largest employment growth over the past year include professional, scientific and technical services, construction and accommodation and food services.

Chart 7: Trend employment growth

This chart shows the trend monthly employment growth from April 2012 to April 2015, which has picked up over the past year.

Source: ABS cat. no. 6202.0 and Treasury.

[View chart data]

Looking forward, indicators such as job advertisements, vacancies and business survey measures of hiring intentions suggest continued growth in employment. The forecast below‑trend GDP growth means that the unemployment rate is still expected to drift up to 6½ per cent in 2015‑16. With the economy forecast to strengthen further in 2016‑17, the unemployment rate is expected to fall to 6¼ per cent.

The participation rate is expected to remain close to recent levels over the forecast period and the outlook has improved compared with the 2014‑15 Budget. The improvement in labour market conditions should encourage some job seekers back to the labour force to resume their search for work but this will be somewhat offset by the ongoing effect of population ageing.

Wage flexibility has been key to supporting employment during a period where the economy has been growing a little below trend. Wage growth has been constrained by spare capacity in the labour market as the economy transitions to the less labour intensive production phase of the resources boom.

The Wage Price Index (WPI) grew by 2.5 per cent over 2014. Wage growth has been subdued in both the public and private sectors as governments across the country focus on expenditure restraint and businesses look to reduce costs. Within the private sector, wage growth has contracted most markedly in mining, retail trade and administrative services.

Income growth is expected to remain modest, consistent with falls in the terms of trade. Accordingly, the WPI is forecast to remain constrained, growing by 2½ per cent through‑the‑year to the June quarter 2015 and 2¾ per cent through‑the‑year to the June quarter 2016.

Consumer prices have grown by 1.3 per cent over the past year, as the removal of the carbon tax, low oil prices and modest domestic activity have kept price growth well contained. In the forecast period, forces are pulling the consumer price index (CPI) in two directions. While wage growth is moderate, the fall in the exchange rate and the increase in the tobacco excise are forecast to contribute to the CPI. Overall, CPI inflation is expected to remain around the middle of the Reserve Bank of Australia's target band at 2½ per cent through the year to the June quarter 2015 and 2016.

Outlook for nominal GDP

While real GDP has been downgraded only modestly compared with the 2014‑15 Budget, there has been a more substantial downgrade to nominal GDP in line with weakening commodity prices and subdued growth in wages. Since the 2014‑15 Budget, nominal GDP growth has been revised down by one and a half percentage points in 2015‑16 to 3¼ per cent before increasing to 5½ per cent in 2016‑17. This will weigh significantly on government taxation receipts with a $52 billion downgrade compared with the 2014‑15 Budget (see Budget Statement 4).

Bulk commodity prices have continued to fall sharply in US dollar terms. Iron ore prices have nearly halved since the 2014‑15 Budget and metallurgical coal prices have fallen by nearly a third. The lower Australian dollar has cushioned some of the fall but even in Australian dollar terms, the decline is still significant.

In part, these falls reflect a fall in costs of commodity producers expressed in US dollar terms as their currencies have fallen against the US dollar. But there are also fundamental factors at play with the global supply of major commodities accelerating at a brisk pace at the same time as resource demand in China has been weakening.

The inherent uncertainty around both supply and demand factors means the iron ore price outlook, particularly over the short run, is subject to considerable risk (Box 3).

Experience shows that prices can move sharply in short periods of time, often at odds with broader market expectations. Recognising the significant recent volatility, the bulk commodity prices used to underpin the forecasts have been based on a recent average. The prices used are US$48 per tonne FOB for iron ore (equivalent to US$53 per tonne cost and freight (CFR)), US$90 per tonne FOB for metallurgical coal and US$60 per tonne FOB for thermal coal.

The impact of iron ore prices being US$10 per tonne lower/higher, based on the sensitivity analysis presented in Budget Statement 7, is set out in Table 4. A US$10 per tonne reduction/increase in the iron ore price results in just over a 3 per cent fall/rise in the terms of trade and a 0.8 per cent reduction in nominal GDP in 2015‑16. These illustrative impacts differ from the ones presented in the Mid‑Year Economic and Fiscal Outlook due to movements in the exchange rate and timing issues.

Table 4: Sensitivity Analysis of Iron Price Movements(a)
  US$38/tonne FOB(b) spot price   US$58/tonne FOB spot price
  2015‑16 2016‑17   2015‑16 2016‑17
Nominal GDP ($billion) -9.8 -13.4   9.8 13.4
Tax Receipts ($billion) -2.1 -4.4   2.1 4.4

(a) Key aggregates are shown relative to the 2015‑16 Budget iron ore spot price forecast of US$48/tonne and based on an exchange rate assumption of 77 US cents.

(b) FOB is the free‑on‑board price which excludes freight costs.

Source: Treasury.

The actual impact of different assumptions about iron ore prices on nominal GDP will depend on movements in the exchange rate, changes in the Australian dollar price actually received by exporters, production decisions by companies and responses in other parts of the economy.

The prices outlook for rural goods is mixed although the depreciation in the Australian dollar will support rural producers. World wheat prices are expected to fall in 2015‑16 as production recovers in the US and other wheat producing regions. Beef prices are forecast to increase in 2015‑16 as strong export demand continues and herds rebuild along with improved seasonal conditions.

Overall, commodity prices are weighing on the terms of trade which are forecast to fall by 8½ per cent in 2015‑16. A modest recovery in some commodity prices and the waning impact of the depreciation of the dollar on imports is forecast to see the terms of trade remain broadly flat in 2016‑17 (Chart 8).

Lower commodity prices reduce nominal GDP through more than just weaker export prices and mining profits. Miners have responded to the new price environment by cutting costs and wage and profit growth has also softened in sectors such as construction and business services that support mining activity.

Chart 8: Terms of trade

This chart shows the historical and forecast level of Australia's terms of trade over the period June 1961 to June 2017

Source: ABS cat no. 5206.0 and Treasury.

Terms of trade
X Values Series1
1/06/1961 58.73
1/09/1961 62.09
1/12/1961 61.09
1/03/1962 63.20
1/06/1962 63.02
1/09/1962 61.96
1/12/1962 61.75
1/03/1963 64.82
1/06/1963 66.16
1/09/1963 68.56
1/12/1963 69.96
1/03/1964 72.42
1/06/1964 70.11
1/09/1964 69.42
1/12/1964 68.27
1/03/1965 65.99
1/06/1965 64.26
1/09/1965 65.43
1/12/1965 66.54
1/03/1966 67.86
1/06/1966 67.88
1/09/1966 66.66
1/12/1966 68.55
1/03/1967 66.58
1/06/1967 64.48
1/09/1967 61.96
1/12/1967 62.96
1/03/1968 64.29
1/06/1968 65.99
1/09/1968 63.48
1/12/1968 62.56
1/03/1969 69.26
1/06/1969 67.36
1/09/1969 66.20
1/12/1969 65.33
1/03/1970 69.39
1/06/1970 65.90
1/09/1970 64.81
1/12/1970 61.98
1/03/1971 62.30
1/06/1971 60.99
1/09/1971 61.90
1/12/1971 54.13
1/03/1972 57.74
1/06/1972 60.09
1/09/1972 63.41
1/12/1972 64.62
1/03/1973 73.79
1/06/1973 76.02
1/09/1973 75.66
1/12/1973 75.11
1/03/1974 79.02
1/06/1974 71.97
1/09/1974 71.41
1/12/1974 67.84
1/03/1975 66.74
1/06/1975 66.17
1/09/1975 64.57
1/12/1975 64.16
1/03/1976 64.45
1/06/1976 66.67
1/09/1976 65.39
1/12/1976 63.24
1/03/1977 62.53
1/06/1977 61.96
1/09/1977 58.66
1/12/1977 56.91
1/03/1978 56.77
1/06/1978 57.93
1/09/1978 56.84
1/12/1978 56.46
1/03/1979 57.46
1/06/1979 59.70
1/09/1979 59.74
1/12/1979 60.37
1/03/1980 60.48
1/06/1980 59.21
1/09/1980 59.09
1/12/1980 59.04
1/03/1981 59.79
1/06/1981 58.91
1/09/1981 60.04
1/12/1981 58.36
1/03/1982 56.67
1/06/1982 58.09
1/09/1982 57.78
1/12/1982 57.22
1/03/1983 57.50
1/06/1983 58.21
1/09/1983 58.11
1/12/1983 58.85
1/03/1984 58.61
1/06/1984 58.91
1/09/1984 59.20
1/12/1984 59.05
1/03/1985 58.75
1/06/1985 55.06
1/09/1985 54.35
1/12/1985 51.98
1/03/1986 51.77
1/06/1986 51.82
1/09/1986 49.41
1/12/1986 49.33
1/03/1987 49.64
1/06/1987 50.68
1/09/1987 52.05
1/12/1987 52.11
1/03/1988 54.72
1/06/1988 57.06
1/09/1988 60.26
1/12/1988 60.55
1/03/1989 63.38
1/06/1989 63.01
1/09/1989 61.95
1/12/1989 62.14
1/03/1990 61.95
1/06/1990 62.31
1/09/1990 61.62
1/12/1990 58.69
1/03/1991 57.85
1/06/1991 57.33
1/09/1991 57.59
1/12/1991 56.98
1/03/1992 57.14
1/06/1992 56.65
1/09/1992 55.61
1/12/1992 54.85
1/03/1993 54.98
1/06/1993 53.38
1/09/1993 53.01
1/12/1993 52.81
1/03/1994 53.47
1/06/1994 53.27
1/09/1994 53.62
1/12/1994 55.52
1/03/1995 55.81
1/06/1995 55.10
1/09/1995 55.35
1/12/1995 56.00
1/03/1996 56.82
1/06/1996 57.98
1/09/1996 58.12
1/12/1996 58.25
1/03/1997 58.37
1/06/1997 58.85
1/09/1997 58.82
1/12/1997 58.46
1/03/1998 57.50
1/06/1998 57.29
1/09/1998 55.47
1/12/1998 54.84
1/03/1999 55.45
1/06/1999 55.14
1/09/1999 55.91
1/12/1999 56.95
1/03/2000 58.81
1/06/2000 57.83
1/09/2000 58.65
1/12/2000 58.34
1/03/2001 58.36
1/06/2001 58.07
1/09/2001 58.85
1/12/2001 58.69
1/03/2002 59.95
1/06/2002 59.27
1/09/2002 59.44
1/12/2002 59.92
1/03/2003 60.49
1/06/2003 60.67
1/09/2003 61.88
1/12/2003 63.17
1/03/2004 65.53
1/06/2004 67.40
1/09/2004 68.06
1/12/2004 68.83
1/03/2005 70.78
1/06/2005 75.42
1/09/2005 76.55
1/12/2005 77.76
1/03/2006 78.92
1/06/2006 80.34
1/09/2006 81.82
1/12/2006 83.47
1/03/2007 85.04
1/06/2007 85.51
1/09/2007 85.25
1/12/2007 86.01
1/03/2008 87.38
1/06/2008 96.18
1/09/2008 102.98
1/12/2008 100.18
1/03/2009 93.40
1/06/2009 85.47
1/09/2009 84.20
1/12/2009 87.06
1/03/2010 91.18
1/06/2010 103.71
1/09/2010 105.54
1/12/2010 107.31
1/03/2011 112.30
1/06/2011 116.80
1/09/2011 118.46
1/12/2011 112.19
1/03/2012 106.45
1/06/2012 106.03
1/09/2012 101.13
1/12/2012 98.86
1/03/2013 99.66
1/06/2013 100.02
1/09/2013 98.10
1/12/2013 98.51
1/03/2014 96.41
1/06/2014 92.74
1/09/2014 89.44
1/12/2014 87.90
1/03/2015 83.05
1/06/2015 78.10
1/09/2015 76.96
1/12/2015 77.48
1/03/2016 77.54
1/06/2016 77.49
1/09/2016 78.16
1/12/2016 78.06
1/03/2017 77.82
1/06/2017 77.63

Source: ABS cat no. 5206.0 and Treasury.

More broadly, wage flexibility is playing an important role in facilitating adjustments in the labour market. Slower wage growth is allowing firms to retain staff at a time when profit growth is modest and will encourage them to employ additional workers as demand increases, but is dragging on nominal GDP growth.

Box 3: Iron ore market developments

The iron ore spot price has nearly halved over the past year (Chart A).

The price fell as low as US$43 per tonne FOB at the start of April, but has partially recovered in recent weeks with signs that some major iron ore producers may delay elements of their expansion plans.

Chart A: Recent spot price developments

This chart shows spot price movements for iron ore and metallurgical coal from January 2014 to current.

Source: Platts.

[View chart data]

The Chinese economy now consumes about 80 per cent of Australia's iron ore exports and the cut in production by Chinese steelmakers in early 2015 was a key factor behind the price declines.

China's construction sector, which accounts for two‑thirds of China's steel usage, has remained weak in early 2015, curbing steelmakers' production plans.

Further growth in low‑cost supply has also continued to weigh on prices. In 2014, increased Chinese iron ore imports from Australia and Brazil (worth a combined 150 million tonnes) more than offset falls in Chinese domestic production and imports from non‑major suppliers.

Despite the fall in prices over the past year, expansion of low‑cost supply is set to continue for some time.

In 2015, Australia is expected to lead the way, adding another 50 million tonnes of exports.

The continued ramp‑up in 2015 will see Australia confirm its position as the single largest supplier globally, with the 770 million tonnes of Australian exports accounting for around a third of global production.

Brazil is still expected to add up to 90 million tonnes of new low‑cost capacity, although most of this is not expected to begin to come on line until the middle of 2016.

On the demand side, the continued weakness in China's housing sector is expected to weigh on China's demand for iron ore in the near term. This reflects the substantial stock of unsold housing that has built up over recent years, as housing starts have consistently outstripped sales (Chart B).

Chart B: Chinese property supply

This Chart shows the floor space started and sold monthly in China from March 2005 to March 2015.

Note: 12 month moving average reported.

Source: CEIC China Database and Treasury.

[View chart data]

That said, macroeconomic policy easing such as the recent 100 basis point cut to the reserve ratio requirement could help support demand for steel in other parts of the Chinese economy, such as infrastructure, as could other potential policy measures targeted at supporting the steel industry.

Meanwhile, demand from other economies including Japan (which accounts for 11 per cent of Australian exports) and Korea (which accounts for 7 per cent) will also help to underpin Australian exports going forward.

As its economy continues to industrialise, India also has the potential to become a major destination for Australian iron ore and coal exports.

While iron ore prices are not expected to rise to levels that were seen during the peak of the commodities cycle, Australia's iron ore industry is generally well positioned as one of the low cost global producers (Chart C).

C: 2015 Iron ore cost curve

This chart depicts 2015 free-on-board US dollar costs for iron ore mines. The data is split between Australian iron ore mines against the rest of the world. Australian mines are largely situatued towards the bottom of the cost curve though does include some smaller high cost mines.

Note: Estimated 2015 iron ore cost curves FOB basis.

Source: AME Group.

[View chart data]

There are a number of key uncertainties. These include the future path of Chinese steel output, the potential for further reductions in mine operating costs and the possibility that companies may alter production plans.

Medium—term projections

The fiscal aggregates in the Budget are underpinned by economic forecasts for the budget year and the subsequent financial year, and by projections for the following two financial years. These projections are not forecasts, but rather are based on a set of medium‑term assumptions.

The medium‑term projection methodology assumes that spare capacity in the economy is absorbed over five years following the two year forecast period. As this occurs, labour market variables, including employment and the participation rate, converge to their long‑run trend levels. To absorb the spare capacity in the economy, from 2017‑18, real GDP is projected to grow above trend, at 3½ per cent, over the five years from 2017‑18 to 2021‑22. By then, spare capacity is absorbed and real GDP grows at trend thereafter.

Trend GDP is estimated based on analysis of underlying trends for population, productivity and participation. The unemployment rate is projected to converge back to 5 per cent over the medium term consistent with Treasury's estimate of the non‑accelerating inflation rate of unemployment (NAIRU). Inflation is projected to be 2½ per cent, consistent with the Reserve Bank of Australia's medium‑term target band. The terms of trade is projected to remain flat at around its 2005‑06 level from 2019‑20.


3 The real exchange rate adjusts nominal exchange rates for differences in relative price levels across countries.