Briefing Notes for the Launch in Canberra, March 2008
Australia's economic performance
- The economy marked 17 years of expansion, with growth rate accelerating from 2.7% in 2006 to 4.3% in 2007 , led by domestic demand growth. Renewed strength in household consumption and continued private sector investment growth were the main drivers of economic expansion.
- Private fixed investment moderated as commodity prices level out and there are increasingly less investment opportunities in natural-resource-based sectors
- The problem of US credit market has not directly affected business sector investment decisions and strong profit growth encouraged investment in the non-mining sector. However, tighter market conditions in the global money market affected the domestic banks. To meet the strong demand for credit, domestic banks had to switch from external funding to domestic sources, pushing up interest rates in the second half of 2007.
- Strong growth in non-farm sector production was partly offset by a large drop in farm sector output, reflecting the impact from the drought.
- Household consumption regained strength in 2007;
- Disposable income increased reflecting tax cuts and continued growth in employment and wages
- Factors that encouraged household consumption in 2007 were
- Housing prices increased and thus household wealth increased. (Price of established houses increased by 12.3% over the year to December 2007 )
- Strong Australian dollar cushioned the economy against the impact of high oil prices
- Labour market remained tight. Full-time employment increased. Unemployment rate was at historical lows and labour participation rate was at a record high. The commodity price boom contributed to the continued strong demand for labour.
- Inflationary pressure continued to cause concern, leading to monetary tightening. Reserve Bank of Australia raised the official cash rate to 6.75% during 2007. Rate has been raised to 7% in February 2008.
- Consumer price inflation rate remained a concern as it was largely reflecting the price volatility of few items such as oil and fruit. Consumer price inflation recorded 3.0% rise over the year to December quarter in 2007, up from 1.9% recorded in September quarter.
- High capacity utilization kept the concern over inflationary pressure. Labour market remained very tight and capacity use was high.
- Current account deficit has widened in 2007.
- Trade deficit widened as import growth exceeded export growth.
- Export volume continued to grow but not in rural sectors. Resource sector exports expanded by over 20% in two years – production capacity has been the major constraint for further growth though continued investment in recent years has gradually eased those constraints.
- Import growth reflected strong domestic demand and a strong exchange rate. Capital import was particularly strong as appetite for investment was still robust.
- Net income deficit remained high due to the high equity payment of foreign companies in Australia and the high interest payments.
- Economic growth in 2008 is expected to continue but at slower pace than 2007 – estimated at 3.2% and 2.8% in 2009. Private consumption is forecast to lead overall economic growth, supported by disposable income growth and wage and employment growth.
- Tighter monetary policy would gradually decelerate consumption growth. Private investment is likely to slow down with tight monetary policy and fewer investment opportunities in the mining sector.
Unequal benefits of growth – agriculture left behind
- Potential benefits from Doha trade talks are significant. ESCAP estimates the aggregate welfare effects under Doha show modest annual gains of $4.6 billion globally in the short run, increasing to $5.2 billion in the long. Two-thirds of the total gains would accrue to Asia. Under Doha reforms, Australia is estimated to gain $856 million in the short-term and $755 million in the long term.
- Under comprehensive agricultural trade reforms, both regional and global welfare gains increase several times. Global welfare gains exceed $23 billion in the short run, increasing to $37 billion in the long run. Developed economies in Asia and the Pacific as a group – Japan, Australia and New Zealand – gain the most under Doha and comprehensive reforms. Under comprehensive reforms, short-term gain for Australia is estimated at $1.2 billion, long term gain $2.1 billion.