Mid-Year Economic and Fiscal Outlook (MYEFO)

The Federal Government today (2 November)  released its Mid-Year Economic and Fiscal Outlook (MYEFO). MYEFO presents the Government’s most up to date information on the condition of the Australian economy. The Treasurer noted that this is the first time a Commonwealth Government has delivered a net saving to the Budget in a Mid-Year Economic and Fiscal Update since they began in 1997-98.

The updated assessment forecasts that the Australian economy will grow by 1.5 per cent in 2009-10 and 2010-11. GDP growth is now projected to be 4 per cent in both 2011-12 and 2012-13 (compared with 4.5 per cent at Budget). In the medium term, the economy will return to its potential growth path in 2014-15, two years earlier than projected at Budget. Unemployment is forecast to peak at 6.75 per cent in the 2010 June quarter.

Notwithstanding this positive news, MYEFO also notes that the impacts of the global economic downturn still mean forecast tax receipts remain $170 billion lower than forecast at the time of the 2008-09 Budget. The Government forecast for the underlying cash deficit in 2009-10 remains largely unchanged from the Budget, at $57.7 billion (4.7 per cent of GDP). The Government forecast that in the three years from 2010-11 to 2012-13, the expected underlying cash deficit will improve by an average of 1 per cent of GDP each year. Accordingly, current projections are for the budget deficit to fall from 4.7 per cent of GDP in 2009-10, to 3.6 per cent of GDP in 2010-11, 2.3 per cent of GDP in 2011-12, and 1.1 per cent of GDP by 2012-13. Headline and underlying inflation are expected to be 2.25 per cent through the year to June in both 2009-10 and 2010-11.

The Government has identified that it will:

  • Fully offset all new spending since the 2009-10 Budget with savings;
  • Budget for real spending growth of less than 2 per cent in the years in which the economy is projected to grow at above-trend rates; and
  • Allow higher tax receipts over the forward estimates to flow through to the budget bottom line.

Other key points:

  •  Household consumption is expected to grow by ¾ of a per cent in 2009-10 (compared to a Budget forecast of ¼ per cent). Household consumption is expected to grow by 2.75 per cent in 2010-11, up from 1.75 per cent forecast at Budget.
  • Dwelling investment prospects have improved. MYEFO forecasts growth of 1.5 per cent in 2009-10 compared with zero growth forecast at Budget. Strong population growth and relatively high rental yields point to more robust investor-led outcomes in 2010-11, with forecast growth of 12 per cent.
  • New business investment is forecast to contract by 6½ per cent in 2009-10, followed by a rebound of 5½ per cent in 2010-11.
  •  While the outlook for the mining sector has improved, underlying private sector investment intentions for the current year remain weak in other sectors.
  • Total non-dwelling construction is forecast to fall by 9.5 per cent in 2009-10 before growing by 5 per cent in 2010-11.
  • The outlook for export volumes has improved, with Commodity exports expected to grow in both 2009-10 and 2010-11, reflecting a stronger outlook for world commodity demand and an expected increase in Australian production capacity. In contrast, exports of elaborately transformed manufactures (ETMs) are expected to fall in 2009-10, before a gradual recovery in 2010-11.
  • The terms of trade are forecast to fall by 9.75 per cent in 2009-10, a smaller fall than forecast at Budget, supported by stronger world spot commodity prices and lower import prices.
  • The terms of trade are forecast to improve in 2010-11 as world demand for raw materials recovers.
  • The current account deficit (CAD) is expected to widen to 5.5 per cent of GDP in 2009-10. The turnaround in the trade balance to a deficit in 2009-10 is a result of the substantial fall in the terms of trade. In line with the recovery in Australian exports, the CAD is expected to narrow marginally to 5.25 per cent in 2010-11.

The MYEFO budget document can be accessed here.