Economic outlook

Despite global headwinds, the Australian economy is expected to continue its transition to broader‑based growth. Household consumption, dwelling investment and exports are expected to support near‑term economic activity, and there has been strong employment growth particularly in the service sectors.

Expectations for global economic conditions have moderated since the 2015‑16 MYEFO, as the world economy continues to struggle to regain sustained momentum. Lower growth is forecast for the United States and economic difficulties in a number of commodity exporting countries have weighed on the outlook. China is expected to support near‑term growth but faces a major rebalancing task towards more consumption‑led growth. The outlook for the United States is more promising but a return to stronger growth is not assured in Europe and Japan. Importantly, in some countries, including the United States and the United Kingdom, wage growth has been relatively low despite robust employment growth.

Domestically, the transition of the Australian economy to broader‑based growth is well underway. Household consumption is expected to grow steadily, underpinned by strong employment growth. Historically low interest rates are supporting growth by lowering borrowing costs for both business and households, although the recovery in non‑mining investment has been slower than expected. Real GDP is expected to grow at 2½ per cent in both 2015‑16 and 2016‑17 before picking up to 3 per cent in 2017‑18, little changed from the outlook at the 2015‑16 MYEFO.

The transition in the Australian economy towards broader‑based growth has been most evident in the labour market where the shift towards the more labour intensive service sectors is underpinning strong employment growth, supported by modest wage growth. Similar to many developed economies, moderate wage growth in Australia is expected to continue to keep inflation contained.

The moderate outlook for wages and weaker forecast prices are weighing on forecast nominal GDP growth of 2½ per cent in 2015‑16, 4¼ per cent in 2016‑17 and 5 per cent in 2017‑18.

There has been some renewed strength over the past quarter in some key commodity export prices, particularly in iron ore. Commodity prices, however, are weaker than those seen over recent years, leading to weaker terms of trade and there is a risk that recent increases in commodity prices will not be sustained. Nevertheless, current prices are closer to longer‑term averages than the extraordinary peaks experienced during the mining boom.

As always, forecasts are subject to uncertainty. A lower exchange rate than that which underpins the forecasts would generate stronger economic growth and provide further impetus to broad‑based growth. Alternatively, uncertainty around the global economic outlook could result in households becoming more cautious, leading to more saving and less consumption than expected.

(a) Year average growth unless otherwise stated. From 2014‑15 to 2017‑18, 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: ABS cat. no. 5206.0, 6202.0, 6345.0, 6401.0 and Treasury.

---