Overview

The state of the economy is a critical issue to 42^nd Parliament. Current economic conditions are generally seen as a key indicator of the quality of a government’s economic management, and form the backdrop to a large number of parliamentary debates. At the time of writing, the Australian economy continues to grow strongly, with unemployment remaining at very low levels and, until recently, with inflationary pressures largely contained. By 2007, the economy had recorded 16 years of continuous economic growth, a period that HSBC economist John Edwards has dubbed ‘the quiet boom’.

Looking forward, there are grounds for cautious optimism in relation to medium-term economic prospects. Of note in this context is Reserve Bank Governor Glenn Stevens’s statement in August 2007:

It would be imprudent to assume that this (high growth) trend will continue indefinitely; nonetheless, it has already gone considerably further than most observers anticipated. When we lift our gaze beyond the conventional forecasting horizon, the big picture is that the emergence of potentially very large economies like China and India at such a rapid pace and with such consistency is unlike anything that we have lived through before.

The latest official views on medium-term prospects are contained in the October
Pre-Election Economic and Fiscal Outlook 2007 (PEFO), which the Treasury and the Department of Finance and Administration published soon after the election was called, and the Reserve Bank of Australia’s (RBA) November Statement on Monetary Policy. The PEFO suggests the following:

• Strong growth is expected in the year ahead, followed by a period of more moderate growth over the later forecast period. Gross Domestic Product (GDP) is expected to grow by 4.25 per cent in 2007–08 and 3.5 per cent in 2008–09, and then to return to 3 per cent in 2009–10 and 2010–11. One view is that, if anything, these growth forecasts are very much on the conservative side.
• The effects of the drought are expected to continue to act as a drag on growth, and farm output is not expected to recover over the forecast period (2007–08 to 2010–11). The very strong growth forecast for the coming year, in spite of this, is seen as a testament to the current strength of the economy in other areas such as business investment and household consumption.
• The outlook for inflation is less favourable, with the Consumer Price Index (CPI) forecast to be at 2.75 per cent in 2007–08 and 2008–09, before returning to a rate of 2.5 per cent (the middle of the official target range for inflation) in 2009–10 and
  2010–11. (These forecasts are lower than those contained in the later RBA Statement, which show headline and underlying inflation remaining at or above 3 per cent over the course of 2008.)
• Employment is expected to grow by 2.25 per cent in 2007–08 and 1.75 per cent in 2008–09. Wages growth is expected to be 4.25 per cent in 2007–08 and 2008–09. Since wages growth exceeds inflation by a modest amount, the forecasts also imply modest increases in real wages.

Australia’s economy also appears likely to continue to perform well in terms of growth when compared with most of the rest of the world. For example, in November 2007, The Economist (London) asked forecasters for their views on 13 advanced economies. For 2007 and 2008 the poll suggested that growth in Australia would average 4.2 and 3.7 per cent respectively, slightly above the official forecasts mentioned above. These forecast rates were the highest of any country in the sample (which excluded China, India and Russia), and were well in excess of forecasts for countries such as the United States (2.0 and 2.1 per cent), Japan (2.0 and 1.8 per cent) and Britain (3.0 and 2.1 per cent).

However, Australia performed less well in The Economist poll on several other key indicators. For instance, Australia’s current account as a percentage of GDP is expected to remain high in relative terms (-5.7 per cent in 2007 and -5.5 per cent in 2008), exceeded only by the United States and Spain. The poll also has consumer price increases in Australia running at 2.4 per cent in 2007 and 2.9 per cent in 2008. This places Australia well towards the top of selected countries in terms of expected inflation.

Elsewhere, commentators have raised other areas of concern for the Australian economy, some of which are addressed in this briefing book. These include:

• continuing uncertainty on global credit markets
• levels of labour force participation that are low relative to many other developed countries
• stagnating levels of productivity
• a large foreign debt, and
• an ageing population that will put upward pressure on public expenditures.

In conclusion, there are firm grounds for cautious optimism in relation to economic conditions over the medium term. This is particularly the case given that very high growth is likely to continue in the Chinese economy, and in other East Asian countries such as India and Indonesia. Nevertheless, some significant challenges also remain. Of these, perhaps the key problem that economic policy will need to address in the medium term will be, not so much how to maintain economic growth per se, but how to do so while at the same time preventing inflationary pressures from overwhelming the system. Continuing debate may therefore occur over the course of the new Parliament about the limits of growth. This is potentially a multi-faceted debate, covering not only macroeconomic management and inflation control, but also broader issues such as the limits of growth in environmental and quality of life terms.

Documentation
John Edwards, Quiet Boom: How the Long Economic Upswing is Changing Australia and its Place in the World, Lowy Institute for International Policy, Paper 14, 2006.
Reserve Bank of Australia, Statement on Monetary Policy, November 2007.
Department of the Treasury and Department of Finance and Administration, Pre-Election Economic and Fiscal Outlook 2007, October 2007.