2017 Budget — Economic Outlook
Australia is in its twenty-sixth consecutive year of economic growth. In 2017-18, growth is expected to rebound to 2.75% per cent after slowing in 2016-17 as a result of weather-related factors in early 2016-17 and more recently Tropical Cyclone Debbie.
The lift in economic growth is expected to occur as the drag from falling mining investment diminishes, growth in household consumption improves and exports continue to grow strongly. Non-mining business investment is also forecast to strengthen. Accommodative monetary policy, a lower exchange rate and a flexible labour market are all helping to facilitate the economic adjustment that has been underway for some time following the peak of the investment phase of the mining boom.
Global growth is expected to recover over the forecast horizon. Last year, the global economy recorded its lowest growth rate since the global financial crisis (GFC) but there are encouraging signs that the outlook is firming. China has entered 2017 with good momentum and the United States economy is performing well. There have also been signs of improvement in other advanced economies and in some of the emerging economies that were affected by previous sharp falls in commodity prices. Some of the major advanced economies are growing above potential, gradually pushing down their unemployment rates. In the United States, this has enabled the Federal Reserve to continue to adjust its monetary policy settings.
Domestically, Australia’s transition towards broader-based activity is well advanced. It is anticipated that growth will lift following the impact of a number of weather-related events in 2016- 17. Real GDP growth is expected to be 2¾ per cent in 2017-18 and 3 per cent in 2018-19. Australia’s economic performance continues to compare favourably with most advanced economies, including other major commodity exporters.
Economic performance across the States and Territories continues to vary widely. The impact of shifts away from mining investment and towards resource exports is being experienced most strongly in Western Australia and Queensland. New South Wales and Victoria are growing faster than their decade averages, supported by lower interest rates, solid population growth and a lower exchange rate.
Mining investment has fallen for the past three financial years and has detracted more than one percentage point a year, on average, from real GDP growth over this period. At the same time, resource exports have made a strong contribution to growth as the adjustment from the investment phase to the production phase of the mining boom has continued. The drag on growth from mining investment is expected to diminish over the forecast horizon and resource exports are forecast to continue to support growth. The last of the major iron ore and liquefied natural gas (LNG) projects are set to reach expected capacity over the forecast period. Other categories of exports are also supporting growth. Service exports are forecast to continue to grow solidly, supported by the sustained depreciation in the exchange rate and strong demand for tourism and education, particularly from Asia. Rural exports are forecast to grow strongly in 2016-17, given the record winter crop, before falling in 2017-18 with an expected return to average seasonal conditions.
Non-mining business investment is expected to benefit as negative spill-overs from the mining sector wane. It will also be supported by a strengthening in domestic demand, solid business conditions and low financing costs. Non-mining business investment is forecast to grow by 4½ per cent in both 2017-18 and 2018-19.
Household consumption growth has been relatively moderate in recent years compared with longrun historical growth rates. It is expected to pick up over the forecast horizon to 2¾ per cent in 2017-18 and 3 per cent in 2018-19. It is expected that consumption will continue to grow by more than household income, resulting in a further decline in the household saving rate.
Dwelling investment is expected to provide near-term support to the economy, with a strong pipeline of residential construction work yet to be done, predominantly in New South Wales and Victoria. As the pipeline comes to completion, growth in dwelling investment is forecast to slow to 1½ per cent in 2017-18. Dwelling investment is expected to fall by 4 per cent in 2018-19.
Over recent years, a slowing in wage and price growth and a significant decline in commodity prices has constrained income growth across the economy. This is affecting households and businesses as well as having a large impact on Government revenue.
The slowdown in wage growth has been widespread across industries and States. Wages growth is expected to improve as domestic demand strengthens but the outlook for wage growth remains subdued in the near term, reflecting spare capacity in the labour market. The near-term outlook for inflation is also subdued. The prices of some of Australia’s major commodity exports rose sharply over the past six months and are providing a temporary boost to national income.
Higher commodity prices are expected to lead to a near-term improvement in the trade balance. As in the 2016-17 Mid-Year Economic and Fiscal Outlook (MYEFO), the forecasts are based on the judgment — supported by broad and deep market and industry consultation — that it is prudent to assume that prices for metallurgical coal and iron ore will not be sustained at recent levels.
Higher commodity prices late last year are forecast to result in a sharp rise in Australia’s terms of trade in 2016-17. The terms of trade are then forecast to fall in 2017-18 and 2018-19. Led by movements in the terms of trade, nominal GDP is expected to grow by 6 per cent in 2016-17 and 4 per cent in both 2017-18 and 2018-19.
As always, there are a number of uncertainties around the forecasts. Heightened policy uncertainty has emerged in a number of countries, including growing support for policies that could restrict global trade and hence growth. High levels of debt, potential financial imbalances and overcapacity in some sectors also remain as risks to China’s economy and Europe continues to face legacy issues following the GFC. The recalibration of interest rates in the United States is also a source of uncertainty for the outlook. In addition, there is greater concern surrounding a number of regional and global strategic issues.
Domestically, the outlook for commodity prices is a key uncertainty for nominal GDP. There are also risks to the real economy around the momentum in household consumption, as well as uncertainty around dwelling investment and non-mining business investment. With a significant number of medium-to-high density dwellings due for completion over the forecast horizon, a faster than expected decline in dwelling investment could also constrain overall real output growth. The timing and pace of the recovery in non-mining business investment also remains a potential risk to the domestic outlook.
Budget Briefing —
Stakeholders from across the dental industry are encouraged to attend the 2017 ADIA Australian Government Budget Briefing that will be held on 24 May 2017 in Sydney. It will be presented by Bill Evans, the Chief Economist at Westpac. [Register Today]
Member Engagement —
ADIA provides leadership, strategy, advocacy and support. Our members set our agenda, fund our activities and directly benefit from the results. With respect to the Association's work to ensure that the initiatives within the 2017 Australian Government budget support the dental industry, the team in the ADIA national office receive advice and guidance from members serving on the ADIA-BAC Business Affairs Committee.
Further Information —
To keep up to date with how ADIA is working to ensure that the Australian Government budget supports the dental industry, subscribe to the Twitter feed @AusDental or follow us on Facebook at www.facebook.com/dental.industry. Alternatively, you can contact the Association via email at email@example.com or by telephone on 1300 943 094.
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