Australian Federal Budget 2017 – Economic Outlook

Growth to lift ...

The Government expects the Australian economy to see a lift in growth in coming years, rising from below trend in 2016/17 to trend in 2017/18 and slightly above in 2018/19. The key dynamics are: a reduced drag from the mining investment downturn; some improvement in consumer spending; and continued strong growth in exports. An improved global backdrop and some lift in non-mining investment are also seen as supports.

Real GDP growth is forecast to lift from 1.75% in 2016/17 to 2.75% in 2017/18 and 3% in 2018/19 and 2019/20. Some of the initial lift reflects a recovery from the impact of tropical Cyclone Debbie, which is estimated to have taken ¼ppt off growth in 2016/17 mainly via disruptions to coal production.

... global backdrop more supportive ...

World growth is expected to become more supportive, rising from 3% in 2016 – the lowest since the GFC – to 3.5% in 2018 and 3.75% in 2019. A recent pick-up in global trade is seen as particularly encouraging.

... but commodity prices to retrace.

Against this, a renewed decline in commodity prices is forecast to exert a modest drag on Australia's income. Although the estimated rise in 2016/17 has been marked up to 16.5% and the pace of decline in 2017/18 moderated to –2.75% from the –3.75% in the MYEFO, the reversal is expected to extend into 2018/19 with a further 4.25% decline. The Government's forecasts continue to assume metallurgical coal prices pull back to US$120/t and iron ore prices back to US$55/t by early 2018, unchanged from the MYEFO.

Nominal income profile little changed vs MYEFO.

The terms of trade reversal effectively flattens the profile for nominal incomes. Nominal GDP growth is expected to come in at 6% for 2016/17 before slowing back to 4% in 2017/18 and 2018/19 – the modest pick up in real growth neutralised by a further fall in export prices. Compared to the Government's forecasts in the MYEFO, the profile for nominal GDP growth is slightly improved over the near term but a touch softer in 2018/19.

'Rebalancing' now well advanced ...

Domestically, the rebalancing of the economy towards non-mining led growth is now seen as well advanced. Low interest rates, an earlier sharp deprecations in the Australian dollar and a flexible labour market are all aiding the adjustment. The drag from contracting mining investment is expected to have largely dissipated by 2018/19 with the pace of decline slowing to just 3%yr. The surge in resource exports is expected to extend a little further, with strong growth in service and rural exports also supportive.

Consumer spending is forecast to improve somewhat, lifting from a subdued 2.5% in 2016/17 to 2.75% in 2018/19 and 3% in 2019/20. Notably, spending growth is expected to outstrip growth in incomes, and hence relies on an assumed further gradual decline in household savings rates.

... timing of key investment cycles remains uncertain ...

Dwelling investment is expected to contribute modestly to growth before reaching a plateau in 2017/18 and falling 4% in 2018-19. The pace of this moderation is a key uncertainty given the concentration of activity in high density projects and the more uncertain time lines of work on these projects. Developments in the wider housing market are another key area of uncertainty potentially impacting both dwelling investment and consumption.

A lift in business investment is still expected to pick up some of the slack. Non-mining businesses are expected to see reduced negative 'spill-overs' from the mining downturn and support from rising domestic demand, solid business conditions and low financing costs. Investment is forecast to grow by 4.5% in both 2017-18 and 2018-19.

Labour market slack is expected to persist with the unemployment rate holding around 5.75% through to June 2018 dipping to 5.5% in June 2019. That compares to a steady 5.5% track throughout in the MYEFO.

... with downside risks to 2018-19 view.

How do these forecasts compare to Westpac’s? The Government is slightly more downbeat on growth near term but more positive for 2018/19 and more upbeat on nominal GDP growth prospects throughout. Westpac is forecasting a more pronounced downturn in dwelling investment and a sharper retracement in commodity prices.

Risks: Australia's growth transition has many moving parts, all with their own risks and uncertainties. The main risk for the Budget though is of a less buoyant growth mix domestically combining with a bigger income drag from falling commodity prices, as well as the risk that global growth cools in 2019 as China slows.


Written by Westpac Economics

Past performance is not a reliable indicator of future performance. The forecasts given above are predictive in character. Whilst every effort has been taken to ensure that the assumptions on which the forecasts are based are reasonable, the forecasts may be affected by incorrect assumptions or by known or unknown risks and uncertainties. The results ultimately achieved may differ substantially from these forecasts.

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