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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 international economy

Global economic conditions have continued to improve and are expected to strengthen somewhat over the forecast period. Australia's major trading partner growth is expected to outpace world growth. This reflects both the improved outlook in advanced economies and the increasing importance of our faster growing Asian partners. It also highlights the opportunity available to Australian businesses and consumers with the world's engine room of growth being in Asia.

Lower oil prices are a net positive for global growth, while central banks in the major advanced economies maintain supportive monetary policy settings. Compared with a year ago, a number of downside risks have abated.

Australia's major trading partners are expected to grow by 4½ per cent in 2015 and 2016. Reflecting the ongoing move to a more sustainable growth rate within the Chinese economy, major trading partner growth is expected to ease a little to 4¼ per cent in 2017.

Table 2: International GDP growth forecasts(a)
  Actuals   Forecasts  
  2014   2015 2016 2017
China 7.4   6 3/4 6 1/2 6 1/4
India 7.2   7 1/2 7 1/2 7 1/2
Japan 0.0   1 1 1/2
United States 2.4   3 1/4 3 1/4 3
Euro area 0.9   1 3/4 1 3/4 1 3/4
Other East Asia(b) 4.1   4 3/4 4 3/4 5
Major trading partners 4.2   4 1/2 4 1/2 4 1/4
World 3.4   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) 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 2015, Thomson Reuters and Treasury.

A period of extraordinary growth rates has made China one of the largest economies in the world. The Chinese economy is now more than double the size that it was a decade ago (Chart 1).

The growth rate is now moderating to a more sustainable pace. Authorities are navigating the dual challenges of transitioning the economy to a more balanced growth model and managing a significant downturn in the property sector. In response to concerns about the pace of the slowdown, monetary policy has been eased and other pro‑growth measures have been introduced in China. Alongside increased infrastructure investment, these measures are expected to support growth.

Chart 1: Chinese real GDP

This chart shows the Chinese real GDP 2005-2014.

Note: 1990 prices.

Source: IMF April 2015 World Economic Outlook.

Chinese real GDP
Year China GDP
2005 8309.76
2006 9363.15
2007 10692.71
2008 11722.92
2009 12803.10
2010 14135.95
2011 15450.59
2012 16649.99
2013 17940.50
2014 19261.54

Note: 1990 prices.

Source: IMF April 2015 World Economic Outlook.

Looking forward, solid and sustained growth in China will be underpinned by the transition to a pattern of growth that is more reliant on consumption. A broader‑based model of growth will enhance the resilience of the Chinese economy as the market plays a more decisive role and institutional settings are reformed. This will also strengthen the economy as it faces long‑term challenges, including an ageing population. A key risk, however, is that China's transition to a more sustainable growth model may not be smooth, presenting changing demand patterns for Australian exports.

Despite the recent impact on commodity prices, China's transition provides opportunities for Australia's economy. China's middle class is projected to increase from around 12 per cent of the population in 2009 to around 70 per cent by 2030.2 Combined with the economy's shift towards consumption‑led growth this will provide significant new markets for our services exports. In 2009, there were 356,400 Chinese visitor arrivals into Australia. By 2013‑14 there were over 760,000 Chinese visitor arrivals to Australia, spending around $6.5 billion or $8,600 per visitor.

India is expected to be the fastest growing major economy in the world in 2015. Growth is forecast to be 7½ per cent in 2015, 2016 and 2017. India's improved prospects reflect the Indian Government's economic reform agenda (Box 1). In addition, ongoing low energy prices have reduced businesses' operating costs and benefited private consumers. They have also contributed to lower‑than‑expected inflation, enabling authorities to ease monetary policy to support growth. If stronger growth is sustained, India could become a much more important trading partner for Australia and the region, which is why the Government is prioritising the negotiation of a Comprehensive Economic Cooperation Agreement with India.

Box 1: India's growing potential as a trading partner

India has the potential to become a major trading partner for Australia. At more than 1.2 billion people, it is the second most populous country, with the third largest economy on a PPP basis. India is expected to overtake China as the world's most populous country by 2030, with the working age population expected to reach around 1 billion by 2030 (Chart A).

Following moderate economic activity in recent years, Indian growth has accelerated and is expected to outpace all other major economies in 2015, exceeding that of China for the first time in over a decade. Growth is being led by strong gains in the manufacturing, service and utilities sectors.

The economic outlook for India has been bolstered by policy reforms including a proposed staged reduction in the rate of company tax, measures to make doing business easier and more predictable, and a commitment to stable macroeconomic policy settings. Increased infrastructure expenditure (including the equivalent of $4 billion for a new National Infrastructure and Investment Fund) and lower energy prices have also enhanced India's growth prospects.

Australian exports to India were worth $10.5 billion in 2013‑14, with commodities (primarily energy) and education services contributing a large share. India and Australia are currently negotiating a Comprehensive Economic Cooperation Agreement, with India being only our twelfth largest trading partner. With trade worth only one‑tenth of our trade with China there is scope to further broaden trade and investment linkages with India.

Box 1: A: India and China working age population (15‑64)

This chart/box shows the Working age population (age 15-64): India and China.

Source: UN Population Statistics.

India and China working age population (15‑64)
X Values Working age population Share of population of working age
2001 653729.86 61.70
2002 667658.33 62.00
2003 681851.25 62.30
2004 696257.25 62.70
2005 710829.53 63.10
2006 724384.54 63.40
2007 738317.77 63.70
2008 752483.18 64.10
2009 766670.79 64.40
2010 780760.55 64.80
2011 794779.75 65.10
2012 808440.65 65.40
2013 821843.33 65.60
2014 835188.33 65.90
2015 848518.18 66.20
2016 860354.13 66.30
2017 872518.72 66.50

Source: UN Population Statistics.

The United States economy is poised to strengthen over the forecast period and provide an impetus to world growth. Low oil prices are contributing to increased household disposable income and, coupled with a strengthening labour market, are supporting private consumption. Along with the pick‑up in domestic demand, business investment is also robust. The recent loss of momentum reflects temporary weather‑related factors, which are now dissipating, and the strength of the US dollar weighing on exports.

The United States is expected to grow at 3¼ per cent in 2015 and 2016 — above its trend growth. Consistent with the strengthening outlook, the US Federal Reserve expects to start normalising monetary policy settings and raising interest rates in the second half of 2015. The pace and timing of rate increases may result in bouts of financial market volatility. Growth is expected to moderate a little to 3 per cent in 2017.

On the back of the stronger outlook, the US dollar continues to appreciate. This strengthening of the US dollar has contributed to a depreciation of the Australian dollar, having positive flow‑on impacts for our economy.

Expectations of a euro area recovery are stronger than they were at 2014‑15 Budget, reflecting a weaker euro and lower commodity prices providing a much needed boost to growth. Given the significant policy impulse to growth, we expect euro area growth to strengthen to 1¾ per cent over the forecast horizon. The recent decline in the euro is expected to raise inflation via higher import prices and support growth by boosting exports.

Nevertheless, recent developments with regard to Greece highlight the continued structural challenges faced by the euro area. Fiscal and structural reforms remain crucial to ensure a sustained recovery.

Economic growth in Japan is also expected to strengthen to 1 per cent in both 2015 and 2016. While activity has been weaker than expected following the increase of the consumption tax rate in April 2014, December quarter 2014 GDP suggests that activity has turned the corner. This improved outlook is underpinned by accommodative monetary and fiscal policy settings, coupled with the depreciation of the yen and lower oil prices. Over the medium to longer term Japan continues to face structural challenges and the ongoing success of the 'Abenomics' reform package will be critical in boosting growth.

Economic growth for the ASEAN 5 economies is expected to accelerate, reflecting falls in commodity prices and improved growth prospects of their trading partners.

2 Kharas and Gertz (2010).