Part 2: Economic Outlook (continued)
International economic outlook
The global economy is expected to recover but at a slower rate than expected at Budget. The United States is leading advanced economy recoveries, but there has been a loss of momentum in both the euro area and Japan.
China's economic transition towards more sustainable growth, and a slowdown in its property market, are weighing on iron ore and coal prices.
The majority of world growth is still expected to come from emerging market economies, predominantly those in our region, with world growth expected to pick up to 3¾ per cent in 2015 and 4 per cent in 2016.
Australia's major trading partner growth is expected to continue to exceed world growth, with forecasts of 4½ per cent in 2015 and 2016. This reflects the relative and increasing importance of fast‑growing east Asian economies within our export markets.
The most immediate risk to the global recovery is the euro area, which faces the possibility of a long period of subdued growth and low inflation. The long period of relatively calm financial markets and rising asset prices could be reversed by a variety of triggers, such as increased geopolitical tensions. Any such reversal could potentially weigh on confidence and growth.
Finally, while China's transition to more moderate but sustainable growth will underpin increasing prosperity and a burgeoning middle class, this transition may not be smooth.
| Actuals | Forecasts | ||||
|---|---|---|---|---|---|
| 2013 | 2014 | 2015 | 2016 | ||
| China(b) | 7.7 | 7 1/4 | 6 3/4 | 6 1/2 | |
| India(b) | 4.7 | 5 1/4 | 5 1/2 | 6 | |
| Japan | 1.5 | 1/2 | 1 | 3/4 | |
| United States | 2.2 | 2 1/4 | 3 | 3 | |
| Euro area | -0.4 | 3/4 | 1 | 1 1/2 | |
| Other East Asia(c) | 4.3 | 4 | 4 3/4 | 4 3/4 | |
| Major trading partners | 4.3 | 4 1/2 | 4 1/2 | 4 1/2 | |
| World | 3.3 | 3 1/4 | 3 3/4 | 4 | |
(a) World, euro area and other East Asia growth rates are calculated using GDP weights based on purchasing power parity (PPP), while growth rates for major trading partners are calculated using export trade weights.
(b) Production‑based measure of GDP.
(c) Other East Asia comprises the newly industrialised economies (NIEs) of Hong Kong, South Korea, Singapore and Taiwan and the Association of Southeast Asian Nations group of five (ASEAN‑5), which comprises Indonesia, Malaysia, the Philippines, Thailand and Vietnam.
Source: National statistical agencies, IMF World Economic Outlook October 2014, Thomson Reuters and Treasury.
The United States (which is our third largest trading partner) has been a source of optimism in the global economy, with a return to strong growth following the first quarter contraction. Fundamentals are improving: household finances are healthy, the labour market is improving and business investment is growing. Forecast growth is 3 per cent in 2015 and 2016.
In line with the recovery, the United States Federal Reserve has brought to a close its program of net asset purchases. This has been done without generating the volatility in financial markets that had been feared, with attention now on the likely timing and pace of interest rate rises. The pace and timing of these rises and the communication strategy by the Federal Reserve may again raise the prospect of volatility in financial markets.
In China, growth is moderating to a more sustainable rate as the economy matures and the benefits of past stimulus fade. While forecasts have been revised down, reflecting this moderation in growth and headwinds from the property market, China is still expected to be the fastest growing and by far the largest of Australia's major trading partners. The composition of growth in China is also as important to the evolution of Australia's trading relationship as the pace of growth.
A key development for our trade with China has been the slowdown in the property market, which has added to broader and significant downward pressure on iron ore prices (Box A). Adding to this has been pre‑existing Chinese overcapacity in resource and energy intensive sectors such as steel and cement. While the impact on growth has been partly offset by supportive policy and improving external demand, the net effect on key commodities has been weaker demand and lower prices.
Looking ahead, solid and sustained growth in China will be underpinned by the transition already underway from investment‑led to consumption‑led growth. This phase of growth is expected to be less resource intensive and, together with recently signed Free Trade Agreements with China, Japan and Korea, should expand export opportunities for Australia in other goods and services. An important component of the medium‑term reform agenda is financial system deregulation. This is critical to improve the efficient allocation of capital across the economy, but carries with it risks as it will require the management of impaired loans in the system.
Forecast growth for China has been downgraded to 6¾ per cent in 2015 and 6½ per cent in 2016 reflecting further signs of weakness since the Budget forecasts were prepared, and since the IMF's World Economic Outlook in October. There are downside risks given the transitions that are taking place, although these are moderated to some degree by the policy buffers at the authorities' disposal. The recent monetary policy easing demonstrates the authorities' preparedness to support growth.
Elsewhere in emerging Asia, India is recovering from an extended downturn, with a steady but promising reform agenda expected to lift medium‑term growth. Forecast growth has been upgraded to 5½ per cent in 2015 and 6 per cent in 2016. The ASEAN‑5 are expected to benefit from lower commodity prices, with Indonesia and Malaysia notable exceptions as fellow commodity exporters.
The euro area recovery lost some momentum this year. Parts of the European periphery are growing strongly, albeit with a lot of ground to make up, but growth in Germany, France and Italy has been weak. Forecast growth has been downgraded to ¾ per cent in 2014 and 1 per cent in 2015, but held at 1½ per cent for 2016. There is a risk of long‑lasting damage to potential growth in the euro area, with depressed business investment and a near‑record high unemployment rate.
As a result of this economic weakness, the euro area is facing persistent low inflation and falling inflation expectations. The European Central Bank has pursued further easing measures in response to these pressures. While highly accommodative monetary policy is expected to support a gradual recovery in activity, progress on fiscal and structural reforms remains key to prospects across the euro area.
In Japan (our second largest trading partner), the recovery faltered following the consumption tax increase in April, with two consecutive quarters of negative growth, suggesting underlying economic weakness rather than a temporary setback. In response, the Bank of Japan has provided further considerable monetary easing, while the Government has pursued a fresh electoral mandate. More broadly, Japan faces significant structural challenges which present downside risks to growth. Forecast growth has been downgraded to ½ per cent in 2014, left at 1 per cent for 2015 and downgraded to ¾ per cent in 2016.