Sensible for now
The economic forecasts underpinning the Budget look reasonable in the short term but further out are impacted by what ANZ Research sees as a slightly more pessimistic outlook for the terms of trade.
As expected, Treasury has made a big upward revision to the terms of trade in 2018-19 due to unexpected positive commodity price moves this financial year. As noted this has been responsible for a large part of the near-term upward revisions to receipts.
Treasury now expects a 4 per cent rise in 2018-19 (compared to a previous expectation of 1.25 per cent rise) but then forecasts a fall of 5.3 per cent in the terms of trade for 2019-20 (compared to a previous expectation of 6 per cent fall). This compares to ANZ Research’s expectations of a 5.5 per cent increase in the terms of trade in 2018-19 and a 2.6 per cent fall in 2019-20.
Consequently, ANZ Research sees stronger nominal GDP growth of 5.3 per cent in 2019-20 compared to Treasury’s 3.6 per cent.
In contrast, Treasury estimates year-average real GDP growth of 2.75 per cent in 2019-20, revised down from a 3 per cent forecast at MYEFO in December 2018. In ANZ Research’s view, real GDP in 2019-20 will be weaker at 2.2 per cent (year-average).
Treasury’s employment growth forecast of 2.1 per cent through the year to June quarter 2020 is a touch stronger than our 1.8 per cent. Treasury’s wage forecast for 2019-20, which ANZ Research has long-thought too strong, was revised down to 2.75 per cent from 3 per cent, between MYEFO and Budget. It is still stronger than ANZ’s forecast of 2.3 per cent, however.