Part 2: Economic Outlook (Continued)
Medium‑term economic projections
The fiscal aggregates in the MYEFO are underpinned by a set of forward estimates consisting of short‑term economic forecasts and projections based on medium‑term assumptions.
Real GDP is projected to grow at its trend rate of around 3 per cent a year over the medium term based on analysis of underlying trends in employment and productivity (Chart 2.2). Trend growth in real GDP is projected to slow from around the end of this decade as the participation rate declines in line with Australia's ageing population profile.
Chart 2.2: Real GDP growth over the forward estimates period
Source: ABS cat. no. 5206.0 and Treasury.
The unemployment rate is projected to be 5 per cent over the medium-term, consistent with Treasury's estimate of the non‑accelerating inflation rate of unemployment. Inflation is projected to be 2½ per cent, consistent with the Reserve Bank of Australia's medium‑term target band.
The terms of trade are projected to decline by a total of around 20 per cent over a 15‑year period, settling around their mid‑2000s level. This reflects an expectation that commodity prices will ease in the longer term as supply increases gradually bring down prices over time.
The exchange rate is assumed to remain around its recent average level during the forecast period. Over the projection period, the exchange rate is assumed to move in line with the long‑term historical relationship between the terms of trade and the real exchange rate. The terms of trade projections imply a fall in the real exchange rate of 0.9 per cent per annum over the projection period.
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