World Economy

Australia Economy to Grow

Australia Economy to GrowAustralia Economy to Grow

The budget’s forecast for economic growth in the coming financial year, 2015-16, is slightly stronger than that of the Reserve Bank of Australia. But, perhaps more significantly, its medium-term growth projections, which help propel the budget back into balance by the end of the decade, are a good deal more optimistic than those of the International Monetary Fund. These IMF projections were published last month in the fund’s World Economic Outlook report, CNBC reported.

The budget’s medium-term projections are also more optimistic than those of several private Australian economists.

The budget forecasts economic growth to pick up from a sub-par 2.75 percent in the coming financial year (which is 0.25 percent better than the RBA is forecasting) to 3.25 percent in 2016-17.

Beyond that, the medium-term projections assume that the economy will grow at an above-trend 3.5 percent per year for five years.

The IMF projections show the economy accelerating more strongly in 2016 and 2017, but slowing to an annual growth rate of just under 3 percent in the following three years.

The effect is to produce a similar level of GDP in 2020. However, if the near-term forecasts of Treasury and the RBA are right (and they are closer to the Australian economy than the IMF), but the IMF’s medium-term projections are a more realistic guide to how Australia can expect to travel in a difficult global economy, there would end up being a quite significant difference in the level of GDP. 

But the IMF is not the only organization predicting a different growth pattern to that assumed in the budget. Back in Australia, the forecasts underpinning the Deloitte Access Economics Budget Monitor report show the economy slowing to 3 percent in 2017-18, when the budget assumes growth will accelerate to 3.5 percent.

It is important to understand the difference between the budget forecasts and projections.

The forecasts cover the budget year and the first year after the budget. They are an attempt to predict what will happen. However, the medium-term projections, to quote the budget papers, “are not forecasts, but rather are based on a set of medium-term assumptions”. In particular, “the medium-term projection methodology assumes that spare capacity in the economy is absorbed over five years following the two-year forecast period”.