Thursday, December 21, 2006

Australian Economy - Mid Year Economic Report

The Australian Government has just released its mid year economic report. The Government is required to do this under the Charter of Budgetary Honesty.

For the benefit especially of my international readers, the Australian Government maintains a budget web site that sets out details of past and present Australian Government budgets and supporting papers and of performance against budget. These contain a wealth of information on Commonwealth Government activities. The mid year economic report can be found on this site.

The report concludes that the Australian economy is slowing, with projected increase in GDP over 2006-2007 down to 2.5 per cent as compared to the budget forecast of 3.25 per cent. As I foreshadowed in an earlier post on 8 November, the continuing drought is now biting hard.

While unemployment measured by the official statistics (these tend to understate real unemployment) remains at historically low levels, this is expected to increase in line with slowing economic activity. In statistical terms, unemployment is a lagging indicator, falling after slowdown begins, rising after expansion begins.

The budget itself remains in surplus, with the underlying cash surplus now projected at $A11.8 billion, up from the estimate at budget time. Again for the benefit of international readers, the Australian Government has been running budget surpluses for many years, leading to close to zero Government debt. In fact, people in the financial markets have been complaining about the reduced availability of Government securities since these have traditionally provided the benchmark for debt portfolios.

Australia's international indebtedness has risen sharply in recent years, but all this increase has all come from increased private sector debt. While this is not seen as a problem by many economists, I must say that it does worry me.

Take the current leverage buy out proposal for Qantas as an example. This will be significantly funded by overseas borrowings. If the funds so released to shareholders are spent in part on consumption (Australia's household sector is now a net dis-saver), then the economy does become more vulnerable to downturn.

The revised economic projections assume continued global economic growth. This is projected at 5.25 per cent in 2006, up .25 per cent from the original budget assumptions, falling to 4.75 per cent in 2007. This strikes me as another significant vulnerability.

One economic plus has been the continued strength of business investment, with the investment share in GDP in 2005-2006 the highest for 32 years. The Government expects this to support future increases in exports.

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