NO.083

2001-02 MID-YEAR ECONOMIC AND FISCAL OUTLOOK SHOWS A RESILIENT AUSTRALIAN

ECONOMY

The 2001-02 Mid-Year Economic and Fiscal Outlook, released today, shows continued

resilience of the Australian economy in a very unfavourable international climate.

The forecast for economic growth in 2001-02 has been revised down slightly

to 3 per cent from 3¼ per cent since the 2001-02 Budget, reflecting in

particular the expected impact of a much weaker world economy offset to some

degree by stronger domestic demand. The outlook for world growth has deteriorated

sharply since the 2001-02 Budget through a combination of downside risks evident

before the September 11 terrorist attacks in the US and additional uncertainty

arising from those attacks. Cumulative growth of major trading partners through

2001 and 2002 is expected to be the weakest in any 2 year period in the last

3 decades.

Despite the global economic uncertainty, the Commonwealth’s fiscal outlook

remains sound, with moderate underlying cash surpluses forecast for 2001-02

and over the forward estimates period. An underlying cash surplus of $0.5 billion

is now anticipated for 2001-02, lower than estimated at the 2001-02 Budget,

with the surplus for 2002-03 remaining at around $1 billion.

In accrual terms, the fiscal balance is expected to remain in deficit over

the next two years before returning to surplus in 2003-04 and beyond. The divergence

between the fiscal and cash surpluses results in part from timing factors and

other non-cash effects, principally the Ansett employee assistance measure in

2001-02.

The Budget forecasts for 2001-02 show stronger revenues coming off a stronger

outcome from the 2000-2001 year, offset by higher expenses principally relating

to higher pension payments resulting from higher wages growth, higher payment

to the States from a revision to the CPI and additional policy expenses, principally

an additional $103 million to process unauthorised boat arrivals.

Domestic demand is forecast to grow by a solid 3¾ per cent in 2001

02, with net exports expected to detract around ¾ per cent from overall

domestic economic growth. At Budget, domestic demand was expected to grow by

3 per cent, with net exports contributing a further ¼ of a percentage

point to growth. This change in the mix of growth represents a sharp turnaround

from 2000 01, when the contribution from net exports to GDP growth substantially

outweighed that of domestic demand.

Employment growth is forecast to be ¾ of one per cent in 2001 02 in

year average terms, with the unemployment rate expected to be 7 per cent in

year average terms. The headline CPI is expected to increase by around 2¾

per cent in 2001 02. The increase in the CPI forecast since Budget largely reflects

a number of one off factors, with ongoing inflationary pressures expected to

remain relatively subdued.

The initial forecast for 2002 03 is for a rebound in economic growth in Australia

to around 3½ per cent — a level more in line with Australia’s

longer term average growth rate. Employment growth is forecast to be slightly

stronger than in 2001 02 and the CPI is forecast to increase by around 2½

per cent.

MELBOURNE

17 October 2001