2018 Budget — Economic outlook
Momentum in the Australian economy strengthened in the second half of 2017, with solid contributions from household consumption and non‑mining business investment. The transition towards more broad‑based sources of growth is occurring, as expected, with the economy forecast to grow by a solid 2¾ per cent in 2017‑18. Growth is then forecast to pick up to 3 per cent in 2018‑19 and 2019‑20 — a pace sufficient to lower the unemployment rate over the next few years.
The Australian economy is being supported by a positive global outlook. Conditions in the global economy have also strengthened in 2017, surpassing expectations. Global growth has risen to its fastest pace in six years, with widespread strength across both advanced and emerging economies. This is expected to continue in 2018. Overall, the global cycle is better synchronised than it has been for some time. Unemployment rates have fallen in most major advanced economies and these economies may push up against capacity constraints over the next few years.
Domestically, the Australian economy has entered its 27th consecutive year of growth. It has performed remarkably well in adjusting from the investment phase of the mining boom towards broader‑based sources of growth. This transition is expected to be completed by the end of the forecast period. Momentum in consumption and non‑mining business investment is expected to underpin a pick‑up in growth, as the drag from the unwinding of the mining investment boom recedes. Mining exports are also forecast to continue to grow solidly.
While the unwinding of the mining investment boom in recent years has had a large direct effect on growth, it has also resulted in negative spillovers in the broader economy. It has especially weighed on non‑mining business investment in Queensland and Western Australia but this effect is diminishing. The Australian economy is also benefiting from population growth, technological developments, positive business conditions and recent gains in national income following renewed strength in the terms of trade.
Accommodative monetary policy settings remain and are continuing to support key areas of the economy. The official cash rate remains at a historic low and has now been stable for the longest period in Australia’s history. This will continue to support both the household and business sectors. The Australian dollar also remains around 30 per cent lower than its 2011 peak against the US dollar.
Recent strength in household consumption has been supported by robust momentum in Australia’s labour market, following the largest increase in employment in 2017 ever recorded over the course of a calendar year, with three‑quarters of these jobs being full‑time positions. In aggregate, almost one million jobs have been added to the economy since September 2013. Employment growth has been broadly based across regions and industries and a recent lift in the participation rate is consistent with increased confidence about employment prospects. Strong participation is expected to continue and the unemployment rate is forecast to decline over the next few years.
Dwelling investment is expected to remain at elevated levels over the forecast period, despite some softening in recent quarters. Activity will be supported by high levels of work in the pipeline as well as recent strength in new approvals. At a regional level, the diminishing drag from the unwinding of the mining investment boom is also playing out across the housing market, as the contraction in dwelling construction appears to be easing in the mining states.
Capital expenditure in the private sector is also benefiting from a strong pipeline of work in the public sector. A robust outlook for public final demand reflects the transition to full scheme for the National Disability Insurance Scheme and strong infrastructure investment by both the States and Territories, and the Commonwealth, including significant investment in transport projects.
Exports should continue to grow steadily over the forecast period, as mining capacity continues to expand and services exports continue to benefit through strong demand from key Asian markets. These rises should more than offset moderating rural exports following record levels of production in 2016‑17. Growth in mining exports will return to more average rates as the transition into the full production phase of the mining boom is completed. By the end of the forecast period, Australia’s resource export capacity should have roughly doubled since the start of the mining investment boom.
While wage growth remains subdued, it is expected to strengthen as growth in the economy picks up to an above‑potential pace and spare capacity in the labour market is absorbed. Higher wages and inflation will contribute to a rise in the level of nominal GDP over coming years. Nominal GDP also continues to be influenced by the terms of trade, which have been supported recently by higher commodity prices. From 2018‑19, the terms of trade are forecast to fall as prices of some key commodities are assumed to decline to more sustainable levels. Adoption of this prudent judgment has been supported by comprehensive market and industry consultation. Nominal GDP is forecast to grow by 4¼ per cent in 2017‑18, 3¾ per cent in 2018‑19 and 4¾ per cent in 2019‑20.
With the economic outlook strengthening both globally and domestically, risks appear more balanced in the short term. To the upside, there is the possibility of growth exceeding forecasts in some key economies, including in the United States as fiscal settings become more supportive. Meanwhile, a potentially faster‑than‑expected tightening of monetary policy, geopolitical uncertainty and recent moves towards trade protectionism present downside risks to the global economic backdrop. Heightened strategic risks are also likely to continue to affect financial and commodity markets. More broadly, a very sharp adjustment in financial markets would pose a risk to both global and domestic activity.
In the longer term, the global economy faces further challenges. In the United States, while the reduction of the corporate tax rate will provide a structural boost to its competitiveness, the expiration of some of the temporary components of the recent package — including the personal tax cuts and depreciation allowance — may shift the balance between fiscal stimulus and less accommodative monetary policy, heightening downside risks there. High levels of debt and potential financial imbalances continue to pose risks to China’s economy and a number of economies elsewhere. All that said, these risks are very hard to quantify and the world economy has shown remarkable resilience in recent years.
Closer to home, risks remain around future household consumption and saving behaviour but this has been the case for several years and the household sector has shown resilience over this time. A change in households’ attitudes towards saving, combined with subdued income growth, may result in slower consumption growth than forecast. There is also a risk that household spending may be affected by any unanticipated tightening in financial conditions, possibly as a consequence of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, although it is too early to assess how likely that is to occur. Meanwhile, stronger‑than‑forecast employment growth could provide an upside risk to consumption growth. Recent increases in the participation rate have elevated the uncertainty around assessments of the degree of spare capacity in the labour market.
The risks around non‑mining business investment are more balanced than they have been for some time. A more significant pick‑up in non‑mining business investment, particularly in the outer years of the forecast horizon, provides upside risk to the forecasts. That said, business investment fell in some industries in 2016‑17 and questions will remain about the sustainability of the pick‑up until growth in non‑mining business investment broadens further across industries.
The outlook for commodity prices is also a significant uncertainty for nominal GDP but the assumptions for these prices remain prudent. Further details on the effect of commodity price movements on nominal GDP and revenue forecasts are discussed in Budget Statement 8: Forecasting Performance and Scenario Analysis.
Member Engagement —
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Further Information —
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