Wednesday, May 09, 2012

Budget 2012-13: A more restrained set of forecasts

It's growth, but not as we thought we'd know it

This time last year Treasury forecast 500,000 new jobs in two years. Nine months in to the first of those financial years the economy has delivered just 29,000 and Treasury is more circumspect.

Acknowledging that employment is likely to grow by a mere 0.5 per cent this financial year, well below the rate of population growth, it is growing for 1.25 per cent next financial year, increasing in the following year to 1.5 per cent.

Because each of these figures is below the rate of population growth Treasury expects Australia’s unemployment rate to climb to 5.5 per cent.

The economy is set to grow by 3.25 per cent in 2012-13, much faster than it has been growing lately, but a far short of the 3.75 per cent pencilled in last year.

It expects the world economy to pick up, growing at 3.25 per cent in 2012. One year ago it was forecasting 4.25 per cent followed by 4.5 per cent.

A year ago Treasury expected household spending to climb 3.5 per cent. This year it expects more “moderate” growth of 3 per cent, broadly in line with income growth as we continue to save rather than boost spending in the face of economic uncertainty.

Investment in housing was to be “subdued” this time last year, growing at just 1.5 per cent. This year Treasury also says it will also be subdued, growing not all in 2012-13 before climbing 2.5 per cent in 2013-14.

Business investment was to soar 16 per cent this time last year followed by 14.5 per cent is this year expected to climb 12.5 per cent followed by 8 per cent...

The terms of trade – a measure of the buying power of what Australia gets for its exports – were last year expected to “decline gradually” after reaching their highest point in 140 years. This year they are expected to slip 5.75 per cent in 2012-13 followed by 3.25 per cent in 2013-14 as increases in the global supply of coal and iron ore put downward pressure on prices. Treasury notes that Australia itself is leading the increase in global supply.

Exports, a year ago expected to climb 6.5 per cent, should in the year ahead climb 4.5 per cent weighed down by the high Australian dollar.

The dollar itself isn’t forecast by Treasury. Instead it uses the “technical assumption” it will remain at around its current level – 103 US cents. A year ago the assumption was that it would remain at its then current level of 107 US cents.

Treasury expects inflation to be worryingly high in the year to June 2013. It says the headline rate will hit 3.25 per cent. But 0.75 points will be the one-off impact of the introduction of the carbon tax, a temporary phenomena the Reserve has said it will not attempt to fight by pushing up interest rates.

Abstracting from the impact of the carbon tax Treasury says the headline inflation rate will be a restrained 2.5 per cent, and the so-called underlying rate an even more modest 2.25 per cent, a rate low enough to give the Reserve Bank room to cut interest rates further should the economy be weak enough to need it.

In today's Canberra Times, Sydney Morning Herald and Age

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