The Australian government has just released its Mid-Year Economic and Fiscal Outlook (MYEFO), including its updated Australian economic forecast from Treasury.
Here they are compared to those offered in the 2017/18 Budget in May.
As widely expected, the government downgraded its forecast for real GDP growth in the current financial year, thanks largely to recent weakness in household consumption, the largest part of the Australian economy.
“The slightly lower real GDP growth forecast in 2017-18 compared with Budget reflects recent modest growth in household consumption, while business investment is expected to grow at a slightly stronger pace than expected at Budget,” it said.
Real GDP is now forecast to grow by 2.5% in 2017/18, down from 2.75% in May’s budget.
For 2018/19, it retained the view that Australian real GDP will grow by 3% — above its current potential deemed to be around 2.75% — due to an expectation that household consumption will rebound thanks to continued strengthening in Australia’s labour market.
“Growth in consumption is expected to pick up over the forecast period in response to strengthening labour market conditions,” the government said.
“Household incomes are also expected to rise over the forecast period, with a pick-up in wage growth.
“Consumption growth is expected to continue to outpace growth in disposable incomes and the household saving rate is expected to fall further.”
On wage growth, the government said it was forecast to grow by 2.25% in 2017/18, down from 2.5% in the May budget. It also downgraded its expectation for wage growth in 2018/19, seeing an increase of 2.75% from 3% six months ago.
According to the ABS’ Wage Price Index (WPI), annual wage growth rose by 2.01% in the year to September, above the 1.94% level reported in the June quarter of this year.
While many believe that Australian wage growth likely bottomed earlier this year, the expected growth for both the current and 2018/19 fiscal years still appears to lie at the overly-optimistic end of the forecasting spectrum.
The downgrades to its wage forecasts came despite a more positive view on the outlook for labour market conditions.
“Employment is forecast to grow by 1.75% through the year to the June quarter 2018 and 1.5% through the year to the June quarter 2019,” the government said.
“The unemployment rate is forecast to be 5.5% in the June quarter 2018 and 5.25% in the June quarter 2019 — lower than forecast at Budget as a result of recent strong labour market outcomes.”
Australia’s unemployment rate currently sits at a multi-year low of 5.4%, according to recent data released by the ABS.
The government’s new employment growth forecasts also imply that recent strength in hiring will moderate slightly from the levels seen in recent months.
Interestingly, the government also sees a reduction in Australia’s labour force participation rate from the 65.5% level where it currently resides.
This partially explains the downward revision to its unemployment forecasts for the 2018/19 financial year, along with continued strength in employment growth.
With firmer labour market conditions helping to boost household consumption, the government added that non-mining business investment, public spending and export growth would also help to underpin economic activity, helping to offset expected weakness in dwelling and mining investment.