Economic outlook
The flexibility of the Australian economy continues to underpin its favourable prospects. The economy is expected to grow strongly in 2007-08, after being affected by severe drought in 2006-07. The strong world economy continues to support growth. Prospects for the household sector have improved, with consumption and dwelling investment growth expected to strengthen, reflecting the continued stimulus to household income and wealth from high commodity prices. Business investment is anticipated to remain at high levels, and export growth is forecast to accelerate. Employment growth is forecast to ease in 2007-08, following a period of strength, and inflation is forecast to moderate.
Real GDP is forecast to grow by 3¾ per cent in 2007-08, up from 2½ per cent in 2006-07. The forecast for 2007‑08 reflects a partial recovery from the drought, which is underpinned by an assumed return to average seasonal conditions. Recovery from the drought is expected to add ½ of a percentage point to GDP growth. Abstracting from the drought, the Australian economy is expected to grow at around trend over the forecast period.
Table 2 presents the major economic parameters used in preparing the budget. The parameters for 2006-07 and 2007-08 are forecasts while those for 2008-09, 2009-10 and 2010-11 are projections. The projections of economic growth are based on analysis of underlying trends in employment and productivity. The projections are not affected by climate change, the uncertain effects of which are in the much longer run outside the projection period.
Similar to the approach adopted since the 2005-06 Budget, key commodity prices are assumed to return to their long-run average level over the first two projection years. This is broadly consistent with aggregate non-rural commodity prices retracing around 60 per cent of their recent gains by the end of the projection period. The projections of inflation are consistent with the medium-term inflation target band.
Table 2: Major economic parameters(a)
- Year-average percentage change.
Source: Australian Bureau of Statistics (ABS) cat. no. 5206.0, 6202.0, 6401.0, 6345.0 and Treasury.