Statement 1 (continued)

Economic outlook

The outlook for the Australian economy remains positive. Historically low interest rates, a lower oil price and a lower exchange rate are all working together to support strengthening economic growth.

Global economic conditions are also supporting growth in the Australian economy. The recovery in the US is becoming increasingly broad-based, while lower currencies and commodity prices are supporting growth in the euro area and Japan. China will continue to make a strong contribution to global growth as authorities look to rebalance the economy towards consumption-led growth and away from investment.

The transition to broader growth in the Australian economy is underway. Exports are expanding as resource investment projects reach completion and the lower exchange rate is supporting a pick‑up in services exports. Housing construction is responding positively to lower interest rates. While still constrained, household consumption growth is solid, underpinned by rising household wealth and lower petrol prices.

Non-mining business investment grew in 2014, particularly in the services sector. Despite this momentum, and supportive fundamentals, more recent data show firms are not yet committing to significant additional investment in 2015‑16. A sustained recovery is now expected to occur a little later than expected in the 2014‑15 Budget.

Even in the face of the adjustment underway as the resource investment boom unwinds, real GDP growth is forecast to increase from 2½ per cent in 2014‑15 to 2¾ per cent in 2015‑16, before increasing further to 3¼ per cent in 2016‑17. The unemployment rate is still expected to peak at 6½ per cent in 2015‑16 with lower forecast wage growth moderating the impact of lower forecast real GDP growth.

The most significant development since the 2014‑15 Budget has been the sharp reduction in the iron ore price, with a substantial increase in global supply coinciding with an easing in steel demand from China.

The forecasts are underpinned by an iron ore price of US$48 per tonne FOB (free on board). By comparison, the spot price forecast in the 2014‑15 Budget averaged US$96 per tonne FOB, which itself was well below the peak price of US$185 per tonne FOB in 2011. Inherent uncertainty around both demand and supply factors means that the price outlook is subject to considerable risk.

Lower commodity prices are flowing through to lower income growth throughout the economy, including wages. Lower wage growth is allowing firms to retain staff at a time when profit growth is modest. Lower wage growth is also helping to keep inflation contained despite the fall in the exchange rate.

As a result of the fall in commodity prices as well as subdued growth in wages, nominal GDP is expected to grow by 3¼ per cent in 2015‑16 before increasing to 5½ per cent in 2016‑17.

As always, forecasts are subject to uncertainty. Sustained momentum in the recoveries in the US and euro area economies could translate into stronger-than-expected growth for major trading partners, which will be a positive for Australia. But there is also the possibility that China's transition to a more sustainable growth model may not be smooth.

(a) Year average unless otherwise stated. In 2013‑14 to 2016‑17, employment, the wage price index and the consumer price index are through the year growth to the June quarter. The unemployment rate is the rate for the June quarter.

Source: ABS Cat. No. 5206.0, 6202.0, 6345.0, 6401.0 and Treasury.