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Half Year Economic and Fiscal Update 2016

Medium-term Outlook

Growth projected to moderate to a more sustainable pace over the medium term…

From a peak of 3.6% in 2017, annual average real production GDP growth moderates to 2.3% by 2021, as the factors underpinning growth in the near term transition to their long-term trends. Growth in aggregate supply slows as net migration inflows ease, and as market investment growth moderates. Lower net migration inflows and rising interest rates drive moderation on the demand side, with real private consumption growth slowing to 2.2% in 2021. However, residential investment is projected to remain elevated over the medium term, reflecting pent-up demand for housing and past under-investment.

Per capita GDP growth slows from a peak of 1.7% in 2018 to 1.1% in 2021, as easing migration inflows and declining labour participation lead to slower growth in labour inputs. Recent changes in the HLFS lower our estimates of economy-wide productivity growth in the year ended March 2017, but thereafter labour productivity growth averages 1.5% per year. The capital stock grows relatively strongly as firms and households catch up to the high rates of labour input growth in preceding years. However, multifactor productivity growth remains subdued.

Annual trading partner growth is projected to remain steady at 3.6% over the medium term, weaker than in the Budget Update, reflecting slower growth in the UK as a result of Brexit and a downward revision of trend growth in the US owing to lower productivity growth. Growth in China is projected to moderate to below 6% in 2021 as it continues to transition from investment to consumption as the main driver of growth. The Australian economy is projected to continue its transition from mining investment to other sources of demand, with growth around trend (2.8%) over the medium term.

Goods export volumes grow modestly over the medium term as trading partner growth remains steady and as growth in global milk production eases, supporting export prices. Weak global inflation is expected to keep import prices subdued, supporting a gradual rise in the terms of trade over the medium term. Ongoing strength in tourism keeps services exports and the services surplus buoyant, while rising global interest rates drive a widening of the income deficit and a widening of the current account deficit to 4.4% of GDP by 2020.

…as net migration inflows ease and potential growth slows…

Annual net migration is assumed to steadily decline from around 70,000 in 2016 to around 20,000 by 2021. Compared to the Budget Update, net migration is higher, owing to a more gradual adjustment path over the forecast period. Further details on the migration assumption are provided in Migration, population growth and potential outputon page 22.

Figure 1.9 - Potential output
Figure 1.9 - Potential output.
Source: The Treasury

Growth in potential output declines over the medium term, driven by slower growth in the labour force as net migration inflows ease. In annual average terms, potential output growth slows from 3.1% in the near term to 2.5% by 2021, but is higher than in the Budget Update given the largerlabour force. Growth in measured labour productivity is slightly below its historical average, although changes to the HLFS mean productivity comparisons need to be treated with caution (see Implications of changes to the Household Labour Force Survey on page 15).

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