Rapidly deteriorating budget forecasts show Australia’s economy hit far worse by the January floods and cyclone and Japan’s tsunami and nuclear disaster than previously believed.
When Treasurer Wayne Swan rises to his feet to deliver the May 10 budget he will announce forecast growth this financial year of just 2.25 per cent, far lower than the 3.25 per cent forecast in the November budget update and well below the 2.5 per cent tossed around informally in budget meetings just weeks ago.
The downgrade wipes around $13 billion off Australian production.
The crumbling growth further pressures Mr Swan to find budget cuts with immediate effect to offset revenue losses that will be felt in 2011-12.
Around half of the one percentage point hit to growth flows this financial year from Cyclone Yasi and the run of floods.
An earlier Treasury briefing seen by The Age said the floods would wipe six billion off gross domestic product from lost coal production alone. Many mines were still unusable and it was “yet to be determined when mine production will be restored to full capacity”.
The Australian disasters are expected to wipe 0.5 percentage points from economic growth this financial year, possibly sending March quarter growth backwards.
“With already patchy growth in some sectors, the impact could lead to flat or even negative growth in the March quarter, although there is likely to be a rebound in the June quarter,” the March minute reads.
The new more negative assessment adds in an extra 0.25 per cent hit to economic growth from Japan’s earthquakes and tsunami...
In addition Treasury has told Mr Swan the non-mining economy is weaker than foreseen.
Consumers are saving and paying down debt rather than spending as had been expected in the November budget update. Mr Swan has been told every component of retail spending is growing below its long-term trend.
The 105 US cent Australian dollar is hurting both exporting and import-competing industries in more deeply than anticipated in the November update which assumed a long term exchange rate of 98.5 US cents.
Borrowing by business is sliding in a way not expected, slipping 1.7 per cent in the past year harming both financial firms and the construction sector. Non-residential construction is languishing around 30 per cent below pre-crisis levels.
Speaking in Washington where he is attending international meetings Mr Swan defended his determination to return the budget to surplus by 2012-13 saying he could do it “without choking off the economic recovery”.
“The early years of the budget will bear the brunt of the natural disasters,” he said. “But these events have not knocked our economy off course.”
The new Treasury forecast puts Australia’s economic growth down towards the bottom of the international pack.
This month’s International Monetary Fund forecasts for 2011 had United States growth of 2.3 per cent, UK growth of 2 per cent, and Japanese growth of 1.5 per cent.
The downgraded forecast relates to only the current financial year. Mr Swan has been told the 3.73 per cent growth forecast for 2011-12 remains on track and could even be revised up.
Budget forecasts are continually revised in the weeks leading up to budget night as new information becomes available. The 2.25 per cent growth forecast for this financial year is firm, but the outlook for future years will continue to be revised over the next three weeks.
Published in today's SMH and Age
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