Part 2: Economic Outlook
Overview
Global growth has weakened since Budget and the international outlook remains highly uncertain. The euro area has fallen back into recession, the recovery in the United States remains subdued and weakness in the major advanced economies is bearing on growth in the large emerging market economies, including China and India.
Against this challenging global backdrop, the fundamentals of the Australian economy remain strong and the outlook remains positive. Economic activity is expected to grow at around its trend rate over the next two years, the unemployment rate is forecast to remain low and inflation is expected to be well‑contained.
Australia's favourable economic growth prospects are supported by a surge in business investment, strong growth in non‑rural commodity exports and solid growth in household consumption.
The challenging global environment, high Australian dollar, household deleveraging, changed household spending patterns and subdued expectations for asset price increases are weighing heavily on some parts of the economy, consistent with forecasts for moderate employment growth and a slight rise in the unemployment rate.
Weaker global demand has also contributed to larger‑than‑anticipated declines in global iron ore and coal prices and in Australia's terms of trade. As a result, Australia's nominal GDP growth is expected to be a percentage point weaker in 2012‑13 than forecast at Budget, with marked consequences for revenue collections.
While the outlook for the emerging market economies of Asia remains favourable, continued uncertainties about how the European sovereign debt crisis and the impending legislated fiscal contraction in the United States (the 'fiscal cliff') will unfold are undermining global confidence.
While crystallisation of these risks could result in a more pronounced slowdown in the emerging market economies of Asia, the central forecasts are for Australia's major trading partners to record solid growth in aggregate.
Australia's linkages to the still fast‑growing Asian region and strong economic fundamentals support our favourable economic growth prospects.
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