Here's how the Australian government thinks the economy will perform over the next few years

Clodagh Kilcoyne/Getty Images
  • The Australian government is predicting larger budget surpluses in the coming years.
  • Its forecasts for wage growth are still very optimistic, but it continues to offer cautious views on Australia’s key commodity prices.
  • It sees unemployment holding steady at 5% over the next 18 months despite an expected small acceleration in Australian GDP growth.

Australia’s fiscal position is the strongest that it’s been in decade, helped by a stronger global and domestic economy and firmer-than-expected prices for Australia’s key commodity exports.

According to the Treasury’s mid-year economic and fiscal outlook (MYEFO), Australia will record an underlying cash deficit of $5.2 billion in the current fiscal year, well below the $14.5 billion deficit projected just six months ago.

In 2019/20, Australia’s budget is expected to return to surplus for the first time since before the GFC with Treasury projecting an underlying cash balance of $4.1 billion, up from $2.2 billion in the May budget.

“After a decade of deficits, the budget is on track to return to surplus in 2019-20, with strong fiscal discipline ensuring these surpluses exceed 1% of GDP in the medium term,” Treasury said.

“Over the four years from 2018-19, the cumulative underlying cash surplus is expected to be $30.4 billion, nearly double the 2018-19 Budget estimate.”

So the government is forecasting bigger budget surpluses in the coming years, helped by an expectation that recent strength in the Australian economy will continue over this period.

Here are the updated economic forecasts released in the MYEFO.

Australian Treasury

The question now is whether they’re realistic, especially as these numbers are those the budget projections are based upon.

At first glance they do appear to be somewhat optimistic, particularly the government’s expectation for wage growth — currently growing at 2.3% per annum in the year to September — will accelerate to 3% next financial year, slightly slower than the very optimistic 3.25% pace seen in the May budget.

Even with the downward revision, that level is still far stronger than what many private sector economists currently expect given the evidence of other advanced in recent years where labour market conditions are significantly tighter than Australia.

The government also expects employment growth will slow in the coming years, although not by the same degree is saw six months ago.

Employment is now expected to grow by 1.75% both in the current fiscal year and in 2019/20, up from 1.5% projected in the May budget.

The government expects that will see Australia’s unemployment rate hold at its present level of 5% over the next 18 months, again raising questions over the forecast for a sharp acceleration in wage growth expected over the same period.

Many private sector forecasters don’t see wage growth beginning to accelerate until unemployment falls to around 4.5%, or lower. The RBA recently suggested that Australia’s full employment rate is now likely around this level.

Along with unchanged forecasts for Australia’s key commodity export prices, seen in the glossary below the forecasts above, Treasury sees nominal GDP growing by 4.75% in the current fiscal year before slowing to 3.5% in 2019/20.

Nominal GDP is the broadest measure of income in the Australian economy, with the upgrade to Treasury’s forecasts for the current fiscal year going someway to explaining why it sees a smaller budget deficit for 2018/19.

“The forecasts of the terms of trade and nominal GDP are sensitive to assumptions about commodity prices,” Treasury said.

“The iron ore spot price is assumed to be $US55 per tonne free-on-board (FOB) over the forecast period. This is consistent with the price assumption at Budget.

“Prices for thermal and metallurgical coal have been higher than expected since Budget. But in recent years there has been heightened volatility in world commodity prices and significant uncertainty around policy changes in China.

“In view of these factors, and current uncertainties in the global economic outlook, prudent assumptions for coal prices have been retained.”

Unlike the wage growth projections, these forecasts are realistic, leaving the potential for upside surprises in budget revenues.

The cautious commodity price forecasts help explain why treasury now sees a larger decline in Australia’s terms of trade next financial year.

“Volatility in commodity price movements remains a significant source of uncertainty in the outlook for nominal GDP,” Treasury said.

Excluding the impact of price movements over the budget forecast horizon, Treasury expects Australian real GDP will grow at 2.75% in the current fiscal year, down from the 3% growth forecast in the May budget.

That’s regarded by many economists as trend growth — the level where inflationary pressures and unemployment are expected to remain steady.

Treasury still sees GDP growth accelerating to 3% in 2019/20, slightly above trend but below the levels forecast by the RBA.

The small uptick is largely underpinned by an expectation that household consumption — the largest part of the economy — will pickup from 2.5% in the current fiscal year to 3% in 2019/20.

That implies that continued strength in the labour market will be enough to offset the impact of expected further declines in Australia’s largest housing markets.

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