Here are the government’s economic forecasts for the coming two years, along with those for the current 2015/16 fiscal year.
Treasury sees real GDP growth of 2.5% in 2016/17 before accelerating to 3.0% in 2017/18, levels at-or-around what many deem to be Australia’s new trend growth rate.
Household consumption — the largest component of GDP, is forecast to grow “steadily, supported by employment growth, lower petrol prices and a falling household saving rate”, according to treasury.
Dwelling investment is expected to remain positive, although “the rate of growth is expected to ease over the forecast period”.
Business investment — on the back of a continued decline in mining sector spend — is expected to fall by a further 25.5% in 2016-17 after contracting 27.5% in the current fiscal year.
“While this drag on growth is expected to lessen by 2017-18, uncertainty remains as to when the transition to broader-based sources of growth, already evident in the labour market, will translate into stronger non-mining investment,” notes treasury.
Over the same time period nominal GDP is tipped to accelerate from 2.5% in the current financial year to 4.25% in 2016/17. Looking further out, this is forecast to grow by 5% in 2017/18, something that is sure to raise some eyebrows.
That was reflected by Moody’s Investors Services shortly after the budget forecasts were released.
“The projected increase in revenues as a share of GDP is based on a return to robust nominal GDP growth which generally comes with a higher revenue-intensity of growth,” said Moody’s.
“Our forecast for nominal GDP growth is somewhat more muted than the government’s. We estimate that the adjustment to an environment of lower commodity prices is still underway and will continue to weigh on corporate profitability and wage growth.
“As a result, improvements in the government’s revenues may be somewhat more muted than currently budgeted.”
Moody’s is forecasting nominal GDP growth of 3.5% in 2016/17, below the 4.25% seen by treasury.
Outside of economic growth, consumer price inflation is tipped to remain subdued, rising to 2.0% in 2016/17 before accelerating to 2.25% in 2017/18.
Employment growth is expected to grow 1.75% over the next two years, down on the 2% level seen in the year to March. As a result, the unemployment rate is tipped to fall to 5.5% in 2016/17, a level it forecast to remain at in 2017/18.
After falling to a record low in the 12 months to December 2015, Australia’s wage price index is expected to reverse course — perhaps optimistically — to 2.5% next year before rising to 2.75% in 2017/18.
The forecasts are based around technical assumptions that the Australian dollar will remain around its recent level —- a trade weighted index of around 64 and a USD exchange rate of around 77 cents — with interest rates assumed to move broadly in line with market expectations.
World oil prices are assumed to remain around US$43 per barrel, just below its current level, with a free on board (FOB) iron ore spot price of US$55 a tonne, again near the current cost and freight spot price.
Metallurgical coal and thermal coal is assumed to average US$91 and US$52 a tonne (FOB).
Some may see the forecasts, particularly for commodity prices and nominal GDP growth, as somewhat optimistic, around trend real GDP, modest employment growth, a slightly lower unemployment rate and continued low inflation seems reasonable, continuing the trend of recent years.
For those looking for further detail, here’s the expanded forecasts offered by treasury.