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Half Year Economic and Fiscal Update 2012

International Outlook

Extreme risks to the international economy have eased, but challenges remain

The European Central Bank's (ECB) announcement of Outright Monetary Transactions has helped to reduce the extreme downside risks to the global economy from a potential break-up of the euro area. Signs that the US housing market is starting to pick up also offer some encouragement, and growth is expected to rise in China in 2013 as well.

However, the economic outlook for the euro area remains weak, with further difficult structural reforms needed across much of the region. Meanwhile, in spite of the recent re-election of President Obama, the economic outlook in the US is overshadowed by political disagreements which could delay a credible medium-term path to fiscal sustainability. One large unknown is the extent to which ongoing economic challenges in the developed economies will constrain growth in the emerging markets, including China.

As Australia's largest export market, developments in China will also have significant knock-on implications for the economic prospects of our largest trading partner. The Australian outlook remains favourable by international standards, although the slowdown in mining investment is greater than previously forecast.

Trading partner growth (TPG) of 3.4% is expected in both the 2012 and 2013 calendar years - slightly below the 30-year average growth rate of 3.8%. In a reflection of New Zealand's increasing trade links with China and other Asian economies, TPG is expected to recover to its long-run average growth rate in the later years of the forecast period, albeit at a slightly slower pace than expected at the time of the Budget Update.

Table 1.2 - Trading partner growth (% change, calendar years)
  2012
Weights
2011
Actual
2012
Forecast
2013
Forecast
2014
Forecast
2015
Forecast
2016
Forecast
2017
Forecast
Australia 28% 2.1 3.6 2.9 2.7 3.1 3.2 3.2
China 15% 9.3 7.7 7.8 7.6 7.3 7.0 7.0
United States 11% 1.8 2.2 2.0 2.3 2.4 2.5 2.5
Euro area 9% 1.5 -0.6 -0.2 1.0 1.2 1.3 1.4
Japan 9% -0.7 2.2 1.0 1.3 1.1 1.0 1.0
United Kingdom 4% 0.8 -0.1 1.0 1.4 1.8 2.0 2.0
Canada 2% 2.4 2.0 2.0 2.3 2.4 2.5 2.5
Other Asia* 23% 4.6 3.7 4.4 5.0 5.0 5.0 5.0
Trading partners 100% 3.2 3.4 3.4 3.6 3.7 3.8 3.8
Consensus (November 2012)   3.2 3.3 3.4 3.8 3.9 3.9 3.8
IMF(October WEO)   3.2 3.3 3.6 3.9 4.1 4.2 4.2

* South Korea, Taiwan, Hong Kong, Singapore, Malaysia, Indonesia, Thailand, Philippines, India

Sources: IMF, Consensus Economics, the Treasury

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