Part 1: Overview (continued)
Updated economic outlook
The Australian economy continues to perform well. Australia's real GDP growth is forecast to strengthen from 2½ per cent in 2015‑16 to 2¾ per cent in 2016‑17, with the economy's transition from resource investment‑led growth towards broader‑based drivers of activity appearing to be underway. This transition is being supported by historically low interest rates, the fall in the Australian dollar and lower oil prices.
World economic growth is expected to improve in 2016 and 2017, providing support to Australia's growth outlook. Global conditions remain uneven, with significant divergence across the major advanced economies. Growth in emerging market economies is expected to pick up in 2016 and 2017, driving more than 70 per cent of world growth. However, risks to the global outlook remain elevated, with China's shifting composition of growth and an uncertain market reaction to the withdrawal of monetary policy stimulus in the United States raising the potential for further volatility.
The Treasury has updated its technical assumptions for growth in the working‑age population and average hours worked, which has affected estimates of the economy's potential output. This contributes to lower projected growth in real and nominal GDP over the coming years.
The assumed pace of real GDP growth in the five years from 2017‑18 has been revised down to 3 per cent, from the 3½ per cent assumed in the 2014‑15 Budget.
Changes to the economic assumptions underpinning the projections have reduced the projected underlying cash balance by around $9 billion over the forward estimates. These changes also affect the medium‑term fiscal projections, with weaker tax receipts impacting the return to surplus (see Box A in Part 3).
| Outcomes | Forecasts | Projections | |||||
|---|---|---|---|---|---|---|---|
| 2014‑15 | 2015‑16 | 2016‑17 | 2017‑18 | 2018‑19 | |||
| Real GDP | 2.2 | 2 1/2 | 2 3/4 | 3 | 3 | ||
| Employment | 1.5 | 2 | 1 3/4 | 1 1/2 | 1 1/2 | ||
| Unemployment rate | 6.0 | 6 | 6 | 5 3/4 | 5 1/2 | ||
| Consumer price index | 1.5 | 2 | 2 1/4 | 2 1/2 | 2 1/2 | ||
| Wage price index | 2.3 | 2 1/2 | 2 3/4 | 2 3/4 | 3 | ||
| Nominal GDP | 1.6 | 2 3/4 | 4 1/2 | 5 | 5 1/4 | ||
(a) Year average unless otherwise stated. From 2014‑15 to 2016‑17, employment and the wage price index are through the year growth to the June quarter. The unemployment rate is the rate for the June quarter. The consumer price index is through the year growth to the June quarter.
Source: Treasury projections.
The number of Australians with jobs rose by over 340,000 over the past year. Employment is forecast to grow by 2 per cent through the year to the June quarter of 2016 and by 1¾ per cent to the June quarter of 2017. The unemployment rate is expected to peak at a lower level than previously forecast, remaining at around 6 per cent in the June quarters of 2016 and 2017.
Soft commodity prices and a moderate outlook for inflation and wages are expected to weigh on nominal GDP growth over the forecast period. Forecast nominal GDP growth has been revised down since the 2015‑16 Budget to 2¾ per cent in 2015‑16 and 4½ per cent in 2016‑17.
The iron ore price assumption has been reduced from US$48 per tonne at the 2015‑16 Budget to US$39 per tonne. While the depreciation of the Australian dollar provides some buffer, the fall in prices is expected to detract around $7 billion from forecast tax receipts over the forward estimates.
Moderate income growth highlights the importance of improving Australia's productivity performance to support future growth in national living standards.