Part 2: Economic Outlook
Overview
Since the 2013 PEFO there has been a substantial deterioration in the domestic outlook for both real and nominal GDP growth. The Australian economy is expected to transition from resources to non‑resources drivers of growth. But this transition is likely to be slower than previously forecast. Resources investment is expected to fall more sharply, while activity in the non‑resources sectors has been subdued, with positive signs in those sectors thus far limited largely to the established housing market, above average measures of consumer sentiment and improving business sentiment. Despite this, sustained low interest rates, particularly if combined with further falls in the exchange rate, should support a recovery across the economy more broadly.
Forecast wage growth has also been revised lower, further weighing on forecast nominal GDP and, in turn, forecast tax receipts and the budget position.
The softness in the non‑resources sectors of the economy is weighing on the labour market. Employment growth remains subdued, and the unemployment rate is forecast to rise to 6¼ per cent by mid‑2015. The participation rate is falling as older workers leave the workforce and younger workers delay their entry. Wages are growing well below previous expectations — while weighing on household income, this will assist in supporting employment.
The outlook for global growth is subdued, although growth is expected to accelerate over the forward estimates.
The weaker outlook for real GDP growth, coupled with the softer outlook for wage and domestic price growth, has resulted in a substantial downward revision to forecast nominal GDP growth in 2014‑15. Higher‑than‑expected iron ore and other key commodity prices are providing some near‑term support to nominal GDP growth. However, the strength in commodity prices is expected to be temporary, with a large increase in supply expected to drive prices lower over the forecast period and beyond.
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