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Marina Kim and Neil Thompson
The global financial crisis, which began in September 2008, has sharply weakened world economic activity. Major OECD economies, including the United States, Japan and many Western European countries, are going through a period of contraction, while growth in the emerging economies, including China, India and those in South-East Asia, has slowed markedly. In aggregate, global economic activity is estimated to have contracted at an annualised rate of around 6 per cent in both the December quarter 2008 and the March quarter 2009.
The slowdown has been particularly pronounced in the OECD economies, many of which are currently in recession. While the US economy has been affected by the intensified strains in credit markets and the continued downturn in the housing sector, the effect on Western Europe and Japan has been largely through the fall in export demand, in addition to difficulties in domestic housing and financial markets.
Emerging Asian economies have also been adversely affected through sharply weaker export demand and tighter credit conditions. Although economic growth in China and India has slowed, there are signs indicating that domestic demand has been holding up. The effect on Eastern Europe, the Ukraine and the Russian Federation has been severe because of their dependence on external financing for manufacturing, imports and exports. The economic downturn has also affected countries in Africa, Latin America and the Middle East. In particular, weaker commodity prices on world markets have led to a considerable decline in their export earnings.
To support economic activity, major world economies have introduced rapid and substantial policy measures. With inflation concerns diminishing and risks of a prolonged recession deepening, central banks worldwide have sharply loosened monetary policy. Many central banks have also directly provided liquidity to money and credit markets to support business lending.
Large fiscal stimulus packages have also been introduced in many economies, including the United States, Japan, Western Europe, China and Australia. For example, as of mid-March 2009, stimulus measures announced by member countries of the Group of Twenty (G20) are estimated at around 3.5 per cent of their combined gross domestic product, which is equivalent to around US$1.5 trillion.
Rapid policy responses in both the OECD and emerging economies have helped support financial market conditions and consumer and business sentiment. While there have been recent signs of improvement in global financial markets, consumer and business confidence remains fragile.
In the next few quarters, global economic activity is expected to remain weak, despite the significant policy support in major world economies. Overall world economic activity is assumed to contract by 1.3 per cent in 2009. This compares with growth of 3.2 per cent in 2008.
World economic growth is assumed to begin a modest recovery from late 2009 and into 2010. Given current weakness in business investment and consumer spending, the economic recovery is expected to be gradual in the short term. For 2010 as a whole world economic growth is assumed to average 2.1 per cent.
In the OECD area, economic activity is assumed to contract by 3.8 per cent in 2009, before recovering slowly to a modest 0.5 per cent in 2010. Among the major OECD economies, the credit constraints are expected to be most severe in the United States and the United Kingdom because of the problems in their financial sectors and relatively high levels of household borrowing. In Japan, the economic downturn in 2009 is likely to be even deeper than in the United States because of Japan’s substantial reliance on exports to other OECD and Asian economies.
The emerging economies in aggregate are assumed to achieve growth of around 2.7 per cent in 2009, before recovering to 4.9 per cent in 2010. This compares with growth of 6.5 per cent in 2008. The fall in global demand for manufacturing products is expected to adversely affect the emerging economies which rely on exports to support growth. China and India are assumed to maintain positive economic growth in the short term, although the pace of economic expansion is expected to be weaker than that achieved in the past few years.
Key assumptions which underpin expectations of world economic recovery in 2010 are the restoration of consumer and investor confidence and the return of stability in financial markets.These assumptions are expected to be realised only gradually in the short term because of the high level of bad debts in the banking sector and rising unemployment in major world economies.
The pace of world economic recovery in the short term also depends on the effectiveness of stimulus packages introduced by government authorities around the world. Monetary policy settings are expected to remain accommodating in the short term and there remains a distinct possibility major OECD countries will implement more fiscal spending to support economic growth.
The substantial fiscal stimulus packages, both existing and forthcoming if any, are expected to place a large burden on government finances in the foreseeable future, with fiscal deficits projected to increase rapidly in both the OECD and emerging economies. The credibility of government plans to restore fiscal balances could have an influence on financial market sentiment in the next few years.
Despite broad-based efforts to restore financial market confidence and to support consumer demand, considerable risks remain in the current world economic outlook. On the downside, there is uncertainty about the effectiveness of policy responses in restoring private sector demand and consumer confidence. Another major risk involves the possibility that banking sector problems could be deeper than currently assumed. If this were the case, it would extend the necessary adjustment in the financial sector and weaken the prospects for world economic recovery.
| key macroeconomic assumptions | |||||||||
| World | 2007 |
2008 |
2009 |
f |
2010 |
f |
|||
|
|||||||||
| Economic growth | |||||||||
| OECD | % |
2.7 |
0.9 |
– 3.8 |
0.5 |
||||
| United States | % |
2.0 |
1.1 |
– 2.8 |
0.5 |
||||
| Japan | % |
2.4 |
– 0.6 |
– 6.2 |
0.7 |
||||
| Western Europe | % |
2.7 |
0.9 |
– 4.2 |
– 0.2 |
||||
| – Germany | % |
2.5 |
1.3 |
– 5.6 |
– 1.0 |
||||
| – France | % |
2.1 |
0.7 |
– 3.0 |
0.4 |
||||
| – United Kingdom | % |
3.0 |
0.7 |
– 4.1 |
– 0.4 |
||||
| – Italy | % |
1.6 |
– 1.0 |
– 4.4 |
– 0.4 |
||||
| Korea, Rep. of | % |
5.1 |
2.2 |
– 4.0 |
1.5 |
||||
| New Zealand | % |
3.2 |
0.3 |
– 2.0 |
0.5 |
||||
|
|||||||||
| Developing countries | % |
8.6 |
6.5 |
2.7 |
4.9 |
||||
| – non-OECD Asia | % |
10.6 |
7.7 |
4.5 |
6.6 |
||||
| South-East Asia a | % |
6.3 |
4.9 |
– 0.7 |
2.5 |
||||
| China b | % |
13.0 |
9.0 |
7.0 |
8.0 |
||||
| Chinese Taipei | % |
5.7 |
0.1 |
– 7.5 |
0.1 |
||||
| India | % |
9.3 |
7.3 |
4.8 |
6.0 |
||||
| – Latin America | % |
5.7 |
4.2 |
– 1.5 |
1.5 |
||||
| Russian Federation | % |
8.1 |
5.6 |
– 5.0 |
0.5 |
||||
| Ukraine | % |
7.9 |
2.1 |
– 7.0 |
1.0 |
||||
| Eastern Europe | % |
5.4 |
2.9 |
– 3.7 |
0.8 |
||||
|
|||||||||
| World c | % |
5.2 |
3.2 |
– 1.3 |
2.1 |
||||
|
|||||||||
| Industrial production | |||||||||
| OECD | % |
2.3 |
– 2.5 |
– 14.5 |
4.5 |
||||
|
|||||||||
| Inflation | |||||||||
| United States | % |
2.9 |
3.8 |
– 0.9 |
0.1 |
||||
|
|||||||||
| Interest rates | |||||||||
| US prime rate d | % |
6.6 |
5.1 |
3.3 |
3.3 |
||||
|
|||||||||
| US exchange rates e | |||||||||
| Yen/US$ | 118 |
104 |
100 |
108 |
|||||
| Euro/US$ | 0.73 |
0.68 |
0.75 |
0.70 |
|||||
|
|||||||||
| Australia | 2006-07 |
2007-08 |
2008-09 |
s |
2009-10 |
f |
|||
|
|||||||||
| Economic growth | % |
3.2 |
3.7 |
0.0 |
-0.5 |
||||
| Inflation | % |
2.9 |
3.4 |
1.8 |
1.8 |
||||
| Interest rates g | % |
6.9 |
7.7 |
6.0 |
5.0 |
||||
|
|||||||||
| Australian exchange rates | |||||||||
| US$/A$ | 0.78 |
0.90 |
0.75 |
0.77 |
|||||
| Yen/A$ | 93 |
99 |
74 |
80 |
|||||
| TWI for A$ h | 65 |
70 |
60 |
62 |
|||||
| a Indonesia, Malaysia, the Philippines, Singapore and Thailand. b Excludes Hong Kong. c Weighted using 2008 purchasing-power-parity (PPP) valuation of country GDPs by the IMF. d Commercial bank prime lending rates in the United States. e Average of daily rates. g Large business weighted average variable rate on credit outstanding. h Base: May 1970 = 100. f ABARE assumptions. Sources:ABARE; ABS; IMF; OECD; RBA. |
|||||||||
There are also specific risk factors associated with economic activity in the major OECD economies. For example, in the United States and Western Europe continued weakness in the national housing markets is a major concern. Rising unemployment could also result in a further decline in consumer demand and an increase in foreclosures, leading to a delay in economic recovery.
However, there are also upside risks to the current world economic outlook. For example, the unprecedented monetary and fiscal stimulus worldwide could have a more significant effect on business and consumer confidence, translating into higher economic growth in 2010 than currently assumed. Indeed, partial indicators released recently provide tentative signs that business and consumer confidence may be improving in a number of major world economies, including China and a few other Asian countries. If the momentum of the recovery strengthens, economic growth in these countries could recover more quickly than currently assumed, leading to higher economic growth in 2010.
The current outbreak of human-to-human transmitted influenza A(H1N1) originated in North America. As of mid-June 2009, there were 108 deaths reported in Mexico, 45 deaths in the United States, four deaths in Canada, two deaths in Chile and one death each in Colombia, Costa Rica, the Dominican Republic and Guatemala. The virus has spread to other countries, with 76 countries reporting 35 928 laboratory confirmed human cases of infection.
In Australia, there were 1542 confirmed cases of influenza A(H1N1), with the majority of cases registered in Victoria. Recognising the continuing spread of the virus around the world, on 11 June 2009 the World Health Organisation raised the level of influenza pandemic alert from phase 5 to phase 6. It indicates there is sustained human to human, community level transmission. The World Health Organisation has also acknowledged that at this time the influenza A(H1N1) is a moderate disease.
The outbreak of influenza A(H1N1) has prompted several countries, including China, the Ukraine, the Russian Federation, Kazakhstan, the Philippines, Thailand and the United Arab Emirates, to ban the import of meat and pork products from some parts of the United States, Canada, Central America and the Caribbean. Regions such as the United States and the European Union have also recommended their citizens avoid non-essential travel to outbreak areas. Australia, Japan, Singapore and the Republic of Korea have introduced measures to screen trans-border passengers, while China has limited flights from Mexico.
At this stage, it is difficult to quantify precisely the effect of the influenza A(H1N1) outbreak on world economic activity. The current outbreak has the potential to affect consumer confidence, and hence, the demand for agricultural commodities in some countries. In particular, it could lead to lower consumption of pig meat, despite the fact that influenza A(H1N1) is not known to be transmissible to people through eating properly handled and prepared pig meat or other products derived from pigs. A decline in pig meat consumption, should it occur, would lower the demand for feed grains. In contrast, the demand for other meats could rise reflecting the effect of substitution.
Since late 2008, economic downturn in the United States has deepened sharply. Gross domestic product, in real terms, is estimated to have contracted at an annualised rate of 5.7 per cent in the March quarter 2009, following a decline of 6.3 per cent in the December quarter 2008. The decline in gross domestic product in early 2009 primarily reflected the falls in exports, business spending and non-residential and residential investment.
Partial indicators released recently suggest economic activity in the United States remains weak. Despite rising slightly in the March quarter 2009, consumer spending is expected to be under considerable downward pressure in the near term. The constraints on consumer spending include tighter bank lending conditions and a sizeable reduction in household wealth as a result of significant declines in real estate and equity prices. Labour market conditions are also expected to remain weak, with 7 million jobs lost since December 2007. The unemployment rate in the United States reached 9.4 per cent in May 2009.
While residential investment has been in decline since early 2006, there are tentative signs that home sales and residential construction activity could be stabilising. However, the inventory adjustment process in the housing and other industries, including manufacturing, is likely to continue for some time. Once the excess inventories are cleared, production is expected to rise gradually if growth in consumer demand can be restored.
US authorities have taken aggressive steps to support economic activity, with the Federal Reserve lowering its official interest rate to nearly zero and implementing measures to address key credit market problems. On the fiscal side, the US Government has introduced a broad range of measures which are estimated to provide stimulus of around 3.8 per cent of gross domestic product in the short term.
In preparing this set of commodity forecasts, the US economy is assumed to contract by 2.8 per cent in 2009 before achieving weak growth of 0.5 per cent in 2010.
There are both downside and upside risks surrounding the current economic outlook for the United States. On the downside, there is a distinct possibility that credit market conditions would remain difficult and that employment, and hence consumer demand, would decline significantly in the short term. On the upside, the pace of economic recovery could be stronger than currently assumed, particularly if consumer and business confidence improves quickly in response to significant stimulus.
Reflecting the adverse effect of the economic downturn on global export demand, economic growth in China decelerated markedly over the past few quarters. Real gross domestic product grew at a year on year rate of 6.1 per cent in the March quarter 2009, after expanding by 6.8 per cent in the December quarter 2008. This compares with an average growth rate of 9.9 per cent in the first three quarters of 2008.
China’s exports contracted for a seventh month in May 2009, with a year on year fall of 26.4 per cent in that month. Exports of mechanical and electrical products, textiles, and toys have been among the most affected. The decline in imports has also been pronounced in recent times (see box).
Partial indicators released recently suggest economic growth may be strengthening in response to increased public infrastructure spending. For example, urban fixed asset investment rose year on year by 32.9 per cent in the first five months of 2009, while bank lending to the private sector reached RMB5.8 trillion (around US$854 billion) over the same period. Retail sales, in volume terms, have also been holding up, with a strong increase in auto sales.
Inflationary pressures have eased markedly, with the consumer price index falling year on year by 1.4 per cent in May 2009, after a decline of 1.5 per cent in April. Looking forward, inflationary pressures are likely to remain subdued providing the scope for further expansionary measures if necessary. The People’s Bank of China has lowered its official interest rate by 216 basis points since September 2008.
In November 2008, the Chinese Government announced a RMB4 trillion (US$586 billion) stimulus package to support domestic demand. New fiscal measures announced since the beginning of this year include plans to spend RMB850 billion (US$124 billion) in the short term to improve healthcare, RMB600 billion (US$88 billion) for research and technical innovation, and a price subsidy of 13 per cent to stimulate rural consumption of household appliances. Specific industrial policies designed to support the adjustment and revival of key industries, such as steel, automobiles and textiles, have also been released.
Against this backdrop, economic growth in China is assumed to strengthen in the next few quarters, averaging around 7 per cent in 2009 and 8 per cent in 2010. While export demand is likely to remain weak in the short term, the main stimulus to economic growth in China is expected to come from the domestic demand, supported by a significant increase in infrastructure investment. A strengthening in economic growth in China should also provide some support to economic activity in the neighbouring countries, particularly Japan, Chinese Taipei, the Republic of Korea and some South-East Asian countries.
The effect of the global downturn on China’s trade
Since China joined the World Trade Organisation in 2001, its merchandise exports have almost quadrupled, while imports have more than tripled. As a result of the strong growth in merchandise trade, China became the second largest exporter and the third largest importer in the world. In 2007, China accounted for 8.9 per cent of world merchandise exports and 6.8 per cent of world merchandise imports, with its trade surplus reaching US$262 billion (WTO 2008). Around 40 per cent of China’s merchandise exports are destined for the rest of Asia, while the European Union and the United States account for 21 per cent and 18 per cent of China’s exports, respectively.
China’s importance in world commodity markets has risen even more significantly over the past decade. For many commodities, China’s import demand has expanded sharply, leading to a marked increase in its share of world trade. For example, in the three years ended 2007 China accounted for 47.4 per cent of world lead concentrates imports, 42.4 per cent of world iron ore imports and 22.3 per cent of world copper concentrates imports. Over the same period, China made up 50.2 per cent of world thermal coal consumption, 48 per cent of world metallurgical coal consumption and 40 per cent of world iron ore consumption.
Trade has been an important driver of China’s rapid economic growth in recent years. Gross exports of goods and services accounted for 40.7 per cent of China’s gross domestic product in 2007, with the share of imports of goods and services estimated at 31.4 per cent of gross domestic product in that year (ADB 2008). Net exports contributed 2.7 percentage points to China’s economic growth in 2007, but the contribution fell to 1.8 percentage points in 2008 as a result of a significant decline in exports toward the end of that year. The development of the export sector attracted significant amounts of foreign direct investment to the country and had positive spillover effects in the form of increased investment in supporting infrastructure and employment.
As the demand in China’s main export markets has been affected by the global economic downturn, China’s exports have fallen sharply since late 2008. The rate of decline accelerated in the first few months of 2009, before moderating recently. Imports have also been falling over the same period, largely as a result of weaker processing demand and the effect of inventory accumulation in upstream industries.
Despite the decline in imports, domestic demand in aggregate has remained resilient in China. This is largely because policy measures taken to mitigate the effect of the global slowdown on China’s economy have shifted the demand away from manufacturing investment toward public infrastructure spending. The resilience of household consumption has not had a large effect on trade, as consumer goods account for only a small share of imports. Moreover, weaker imports may have reflected, to some extent, the re-direction of exports to the domestic market and import substitution.
Since mid-2008, when the slowdown in world economic growth intensified, manufacturing firms in China began to reduce inventories of raw materials, while inventories of finished goods increased. A substantial fall in demand has induced manufacturing firms to cut production, notably in such industries as steel, heavy machinery, textiles, toys and automobiles. The pace of destocking accelerated in late 2008 before moderating in early 2009.
In line with a more moderate pace of inventory adjustment, imports of raw materials to China appear to have recovered in recent months. For example, China’s net imports of refined copper were 1.1 million tonnes in the first four months of 2009, compared with 486 000 tonnes in the same period in 2008. China imported 313 000 tonnes of refined zinc between January and April 2009, compared with 4000 tonnes in the same period a year earlier. Net iron ore imports reached 188.5 million tonnes in the first four months of 2009, from 153.5 million tonnes in the same period a year earlier.
While higher raw material imports indicate the relative strength of China’s economy compared with the rest of the world, they may also reflect some stock building, particularly by the state reserves bureaus and local governments. In addition to speculative and strategic considerations, China’s recent restocking may also reflect an expected increase in consumption underpinned by the Chinese Government’s stimulus package.
A more pronounced effect of the stimulus package should provide an additional impetus to China’s commodity demand in the coming quarters. Indeed, the recent purchasing manager indices (PMIs) indicate that industrial production is recovering in China. In May 2009, the official PMI remained above 50 for the third consecutive month, which indicates an expansion in industrial production activity. The new orders component of the PMI remained strong at 56.2, while the export component rose to 50.1 from 49.1 a month earlier.
In the face of the current global economic downturn, China continues to play an important role in world commodity markets. It has provided support to world commodity demand, while demand in other parts of the world remains relatively subdued.
Sources: World Trade Organisation (WTO) 2008, International Trade Statistics 2008, Geneva; Asian Development Bank (ADB) 2008, Key Indicators for Asia and the Pacific 2008, Manila.
Economic growth in India has also slowed sharply since late 2008, with a year on year rate of 5.8 per cent recorded in both the March quarter 2009 and the December quarter 2008. This compares with the average growth of 8 per cent in the first three quarters of 2008.
The slowdown in the Indian economy has occurred largely in response to reduced foreign investment flows and weaker export performance, including the information technology and business processing industries. As a result, industrial production has also declined markedly.
The Indian Government has announced three stimulus packages since late 2008, including reduced consumption taxes on goods and services, capital injections to banks and higher infrastructure spending. In addition, the Reserve Bank of India reduced its official interest rate by 425 basis points between October 2008 and May 2009.
Economic growth in India is assumed to average 4.8 per cent in 2009, before recovering to around 6 per cent in 2010. Major downside risks to this outlook relate to the subdued prospects for foreign investment spending and continued weak global demand for exports. These risk factors could have an adverse effect on employment and consumer spending leading to even weaker economic activity in the short term.
Economic activity in Japan and the Republic of Korea has been adversely affected by sharply weaker external demand, especially from other OECD economies. In Japan, real gross domestic product contracted at an annualised rate of 14.2 per cent in the March quarter 2009, following a decline of 13.5 per cent in the December quarter 2008. The fall in economic activity in the Republic of Korea has also been significant, with real gross domestic product declining year on year by 4.2 per cent in the March quarter 2009, after a contraction of 3.4 per cent in the December quarter 2008.
Partial indicators released recently suggest economic activity in these two countries could begin to stabilise in the near term. While export performance continues to be subdued in both countries, there are tentative signs that industrial production may be stabilising and that consumer and business confidence is gradually improving.
However, labour market conditions remain weak, suggesting continued downward pressure on consumer spending. In April 2009, the unemployment rate rose to 5 per cent in Japan and 3.7 per cent in the Republic of Korea, their highest levels in around five and four years respectively.
The Japanese Government announced a 15.4 trillion yen (US$158 billion) stimulus plan in April 2009, the third since September 2008, to mitigate the effect of the global downturn. In March 2009, the Korean Government announced a fiscal package of 17.7 trillion won (US$14 billion) to support domestic demand, following a 50 trillion won (US$40 billion) stimulus in late 2008.
Looking forward, weak external demand is expected to continue detracting from economic growth in the short term. For the Japanese economy, activity is assumed to contract by 6.2 per cent in 2009, before recovering gradually to the average growth of 0.7 per cent in 2010. For the Republic of Korea, the economy is assumed to contract by 4 per cent in 2009, before recording modest growth of 1.5 per cent in 2010.
The global economic downturn has had a significant effect on economic activity in non-OECD Asia, with a substantial fall in output across a number of regional economies. The declines in output mainly reflect substantially weaker export demand for consumer durables and capital goods from the OECD economies and, to a lesser extent, the tightening in world credit market conditions.
The decline in global demand has led to a sharp fall in regional exports and industrial production. For example, in Singapore industrial production contracted for the seventh consecutive month in April 2009, although a year on year fall of around 0.5 per cent was less than a 32.8 per cent decline in March 2009. Singapore’s exports declined for the twelfth consecutive month in April 2009, while the rate of contraction also appears to be slowing. Similar trends are occurring in other South-East Asian economies. As a result of the global financial crisis, domestic credit conditions have also tightened and capital inflows have declined.
In response to the weakening economic conditions, central banks in many emerging Asian economies, including Indonesia, Malaysia, the Philippines and Thailand, have lowered their official interest rates and took a range of measures to inject liquidity into money markets. A number of regional economies have also implemented substantial fiscal stimulus to support domestic demand. In March 2009, for example, the Malaysian authorities announced a second stimulus package totaling RM60 billion (US$16 billion) over the next two years.
In preparing this set of commodity forecasts, economic activity in non-OECD Asia is assumed to slow to 4.5 per cent in 2009 from 7.7 per cent in 2008, before recovering to 6.6 per cent in 2010.
A key risk to the current regional outlook relates to the economic performance of the OECD economies. A deeper or longer downturn in the OECD economies than currently assumed could have a further adverse effect on economic growth in non-OECD Asia through reduced export demand and foreign investment flows. In addition, further worsening in global credit conditions, if it were to occur, could place considerable pressure on financial markets and the corporate sector in the region.
Following a significant tightening in credit market conditions and a sharp fall in external demand, economic contraction in Western Europe has deepened over the past few months. On a seasonally adjusted basis, real gross domestic product in the euro area declined year on year by 4.8 per cent in the March quarter 2009, following a contraction of 1.7 per cent in the December quarter 2008.
Reflecting weaker regional economic activity, inflation in the euro area fell from a year on year rate of 4 per cent in July 2008 to 0 per cent in May 2009. Moderating price pressures have provided scope for the European Central Bank to reduce its benchmark interest rate by 325 basis points since September 2008. Many regional economies have also introduced fiscal measures to support domestic demand. For example, the European Economic Recovery Plan endorsed by the European Council in December 2008 is estimated to provide stimulus of around 1.5 per cent of gross domestic product in the euro area in the short term.
Economic activity in Western Europe is assumed to contract by 4.2 per cent in 2009, reflecting significant declines in both external and domestic demand. In 2010, economic activity is assumed to contract by a further 0.2 per cent. Considerable downside risks remain in the economic outlook for Western Europe, given the current weakness in domestic demand and balance sheet issues of the regional financial institutions. In particular, declining economic activity could increase bad debts and intensify pressures on the profit outlook of the regional financial institutions, which could lead to a further tightening in consumer and business lending.
After contracting in late 2008, the Australian economy expanded modestly in early 2009. In seasonally adjusted terms, real gross domestic product rose by 0.4 per cent in the March quarter 2009, following a contraction of 0.6 per cent in the December quarter 2008. Compared with the same quarter a year earlier, gross domestic product increased by 0.4 per cent in the March quarter 2009.
In seasonally adjusted terms, non-farm gross domestic product increased by 0.5 per cent in the March quarter 2009. The main positive contributors to growth in gross domestic product were lower imports (1.6 percentage points), higher exports (0.6 percentage points) and increased household final consumption expenditure (0.3 percentage points). The largest negative contribution came from a decline in private business investment (-1.1 percentage points).
In May 2009, the Australian Government announced a $22 billion Nation Building Infrastructure investment program, which provides funding for roads, rail, ports, the Clean Energy Initiative, universities, research, hospitals and broadband.The stimulus packages announced since late 2008 are expected to raise the level of gross domestic product by 2.75 per cent in 2009-10 and 1.5 per cent in 2010-11.
Economic activity in Australia is estimated to have remained largely unchanged for 2008-09 as a whole. In 2009-10, economic activity in Australia is assumed to contract by 0.5 per cent.
Assuming an improvement in seasonal conditions, the volume of farm production is forecast to increase by 0.3 per cent in 2009-10. The volume of crop production is forecast to expand by 1.1 per cent, while livestock production is forecast to fall slightly by 0.7 per cent in 2009-10. For minerals and energy, the volume of mine production is forecast to increase by 2.7 per cent in 2009-10.
Inflationary pressures in Australia have moderated. The consumer price index rose year on year by 2.5 per cent in the March quarter 2009, after an increase of 3.7 per cent in the December quarter 2008 and 5 per cent in the September quarter 2008. Contributing most to the slower inflation rate in the March quarter were deposit and loan facilities (-14.1 per cent), automotive fuel (-8.1 per cent), domestic holiday travel and accommodation (-5.1 per cent) and overseas holiday travel and accommodation (-4.0 per cent).
Looking forward, inflationary pressures in Australia are likely to ease further, reflecting the weaker outlook for economic growth. For 2009-10 as a whole, Australia’s inflation rate is assumed to average around 1.75 per cent, largely unchanged from the estimated rate in 2008-09.
After depreciating significantly in late 2008 and early 2009, the Australian dollar has appreciated both against the US dollar and on a trade weighted basis in recent months. The Australian dollar was trading around US80c and TWI 64 in early June 2009. This compares with US70c in late March 2009, a recent low of US60c in late October 2008 and a recent high of US98c in mid-July 2008.
The recent appreciation of the Australian dollar appears to reflect an improvement in financial market sentiment toward the prospects for world economic recovery, the likely effect of stronger world economic activity on commodity demand and prices, and the implications of the above developments for Australia’s terms of trade and export performance.
Another factor which has affected movements in the Australian dollar is a weakening of the US dollar against major international currencies. The US dollar was trading around €0.72 and ¥96 in early June 2009, compared with €0.74 and ¥98 in late March 2009, and €0.80 and ¥102 in late October 2008.
Looking forward, an assumed improvement in world economic activity is expected to provide support to the Australian dollar in the short term. Judging by its historical movements, the Australian dollar has a tendency to appreciate strongly in the beginning phase of world economic recovery. This mainly reflects market expectations of stronger commodity prices on world markets, especially for minerals and energy, in response to improved prospects for world economic growth. Therefore, there is a distinct possibility the Australian dollar could remain at its current level or even appreciate further against the US dollar in the near term. This would especially be the case if economic indicators continue pointing to a stronger than expected world economic recovery.
In preparing this set of commodity forecasts, the Australian dollar is assumed to average around US77c and TWI 62 in 2009-10. This compares with an average of US75c and TWI 60 in 2008-09.
There is considerable uncertainty surrounding the short-term outlook for the Australian dollar. This is because movements in the Australian exchange rate can be significantly influenced by changes in financial market sentiment, leading to strong volatility in the Australian exchange rate. As discussed above, over the past 12 months the Australian dollar has fluctuated from a high of US98c and TWI 74 in mid-July 2008 to a low of US60c and TWI 51 in late October 2008. Since the floating of the Australian dollar in December 1983, it has had an average annual fluctuation range of more than US10c. Consequently, it remains important for primary producers and exporters to manage the risks associated with fluctuations in the Australian exchange rate.
The index of unit export returns for Australian commodities, in aggregate, is forecast to fall by 21.6 per cent in 2009-10, following an estimated rise of 30.1 per cent in 2008-09. While world prices for some commodities are expected to rise during the course of 2009-10, the recent significant appreciation of the Australian dollar, especially against the US dollar, if sustained, has the potential to adversely affect commodity export earnings.
For farm commodities, the index of unit export returns is forecast to increase by a further 0.5 per cent in 2009-10, after rising by 1.6 per cent in 2008-09. Unit export returns for Australian mineral resources are forecast to fall by 25.4 per cent in 2009-10, following an estimated rise of 36.2 per cent in 2008-09. The fall in 2009-10 largely reflects the effects of lower negotiated prices for coking coal, thermal coal and iron ore.
Unit returns for energy exports are forecast to decline by 36.3 per cent in 2009-10, compared with an increase of 69.4 per cent in 2008-09. Unit export returns for metals and other minerals are forecast to decrease by 15 per cent in 2009-10, after rising by 13.8 per cent in 2008-09.
The value of Australian commodity exports is forecast to be around $160.5 billion in 2009-10, a fall of 18.1 per cent from an estimated $195.9 billion in 2008-09.
Assuming a return to more favourable seasonal conditions, export earnings for farm commodities are forecast to be around $32.5 billion in 2009-10, a rise of 2 per cent from an estimated $31.8 billion in 2008-09. Farm commodities for which export earnings are forecast to be higher in 2009-10 include wheat, barley, lupins, peas, rice, raw cotton and sugar. For forest and fisheries products, export earnings are forecast to be around $3.6 billion in 2009-10, a decline of 3.2 per cent from their estimated value in 2008-09.
Export earnings for Australian mineral and energy commodities are forecast to be around $124.4 billion in 2009-10, compared with an estimated $160.4 billion in 2008-09. The value of energy exports is forecast to fall by 34.1 per cent to $49.8 billion in 2009-10. For metals and other minerals, export earnings are forecast to decline by 12 per cent to $74.6 billion in 2009-10.
| Major indicators of Australia’s commodity sector | |||||||||||
2004-05 |
2005-06 |
2006-07 |
2007-08 |
2008-09 |
s |
2009-10 |
f |
change from previous year |
|||
 |
|||||||||||
2008-09 |
2009-10 |
||||||||||
% |
% |
||||||||||
|
|||||||||||
| Commodity exports | |||||||||||
| Exchange rate | US$/A$ |
0.75 |
0.75 |
0.78 |
0.90 |
0.75 |
0.77 |
– 16.7 |
2.7 |
||
| Unit returns a | |||||||||||
| Farm | index |
100.0 |
99.5 |
104.5 |
115.5 |
117.4 |
118.0 |
1.6 |
0.5 |
||
| Mineral resources | index |
100.0 |
132.1 |
145.1 |
151.7 |
206.6 |
154.2 |
36.2 |
– 25.4 |
||
| – energy minerals | index |
100.0 |
135.5 |
123.6 |
140.7 |
238.3 |
151.7 |
69.4 |
– 36.3 |
||
| – metals and other minerals | index |
100.0 |
129.3 |
162.2 |
160.4 |
182.6 |
155.3 |
13.8 |
– 15.0 |
||
| Total commodities | index |
100.0 |
123.4 |
134.3 |
141.7 |
184.3 |
144.4 |
30.1 |
– 21.6 |
||
|
|||||||||||
| Value of exports | |||||||||||
| Farm | A$m |
27 902 |
27 801 |
27 788 |
27 528 |
31 847 |
32 485 |
15.7 |
2.0 |
||
| – crops | A$m |
13 679 |
13 968 |
12 974 |
13 025 |
16 653 |
18 192 |
27.9 |
9.2 |
||
| – livestock | A$m |
14 223 |
13 833 |
14 815 |
14 503 |
15 194 |
14 293 |
4.8 |
– 5.9 |
||
| Forest and fisheries products | A$m |
3 660 |
3 687 |
3 849 |
3 813 |
3 718 |
3 597 |
– 2.5 |
– 3.2 |
||
| Mineral resources | A$m |
69 511 |
92 611 |
107 976 |
117 791 |
160 377 |
124 387 |
36.2 |
– 22.4 |
||
| – energy minerals | A$m |
29 696 |
39 328 |
39 427 |
45 591 |
75 605 |
49 817 |
65.8 |
– 34.1 |
||
| – metals and other minerals | A$m |
39 816 |
53 283 |
68 549 |
72 199 |
84 772 |
74 570 |
17.4 |
– 12.0 |
||
| Total commodities | A$m |
101 073 |
124 099 |
139 613 |
149 132 |
195 942 |
160 470 |
31.4 |
– 18.1 |
||
|
|||||||||||
| Farm sector | |||||||||||
| Gross value of farm production b | A$m |
36 537 |
38 695 |
36 247 |
44 098 |
44 958 |
44 462 |
1.9 |
– 1.1 |
||
| – crops | A$m |
18 717 |
20 900 |
17 995 |
24 184 |
25 151 |
25 421 |
4.0 |
1.1 |
||
| – livestock | A$m |
17 820 |
17 796 |
18 252 |
19 913 |
19 806 |
19 041 |
– 0.5 |
– 3.9 |
||
| Farm costs | A$m |
29 243 |
31 276 |
31 413 |
36 969 |
36 248 |
35 577 |
– 2.0 |
– 1.9 |
||
| Net cash income c | A$m |
12 582 |
11 308 |
9 980 |
11 444 |
13 899 |
13 608 |
21.4 |
– 2.1 |
||
| Net value of farm production d | A$m |
7 294 |
7 419 |
4 833 |
7 128 |
8 710 |
8 885 |
22.2 |
2.0 |
||
| Farmers’ terms of trade | index |
91.7 |
91.0 |
94.1 |
91.6 |
94.0 |
95.6 |
2.6 |
1.7 |
||
| Volume of farm production | index |
107.8 |
111.7 |
95.2 |
105.7 |
110.6 |
110.9 |
4.6 |
0.3 |
||
| – crops | index |
111.3 |
119.7 |
84.3 |
107.3 |
119.0 |
120.3 |
10.9 |
1.1 |
||
| – livestock | index |
103.1 |
103.0 |
105.5 |
102.5 |
100.4 |
99.7 |
– 2.0 |
– 0.7 |
||
| Crop area and livestock numbers | |||||||||||
| Crop area (grains and oilseeds) | ’000 ha |
23 808 |
22 197 |
21 054 |
23 077 |
22 893 |
23 076 |
– 0.8 |
0.8 |
||
| Sheep | million |
100.6 |
91.0 |
85.7 |
76.9 |
73.2 |
69.9 |
– 4.8 |
– 4.5 |
||
| Cattle | million |
28.2 |
28.4 |
28.0 |
27.3 |
27.4 |
27.6 |
0.4 |
0.7 |
||
|
|||||||||||
| Minerals and energy sector | |||||||||||
| Volume of mine production | index |
118.6 |
118.1 |
121.2 |
120.5 |
118.8 |
122.0 |
– 1.4 |
2.7 |
||
| – energy | index |
113.4 |
111.6 |
118.5 |
116.4 |
117.8 |
117.2 |
1.2 |
– 0.5 |
||
| – metals and other minerals | index |
123.5 |
124.2 |
124.3 |
124.7 |
119.6 |
127.6 |
– 4.1 |
6.7 |
||
| Gross value of mine production | A$m |
66 731 |
88 907 |
103 657 |
113 079 |
153 962 |
119 412 |
36.2 |
– 22.4 |
||
| New capital expenditure e | A$m |
10 253 |
18 608 |
22 119 |
27 353 |
34 478 |
37 880 |
26.0 |
9.9 |
||
| Exploration expenditure | A$m |
2 073 |
2 503 |
3 940 |
5 496 |
5 328 |
na |
– 3.1 |
na |
||
| – energy | A$m |
1 192 |
1 484 |
2 533 |
3 501 |
3 161 |
na |
– 9.7 |
na |
||
| – metals and other minerals | A$m |
881 |
1 018 |
1 407 |
1 995 |
2 167 |
na |
8.6 |
na |
||
|
|||||||||||
| Employment | |||||||||||
| Agriculture, forestry and fishing | ’000 |
361 |
353 |
355 |
359 |
na |
na |
na |
na |
||
| Mining | ’000 |
93 |
115 |
120 |
127 |
na |
na |
na |
na |
||
|
|||||||||||
| Australia | ’000 |
9 533 |
9 857 |
10 123 |
10 366 |
na |
na |
na |
na |
||
| a Base: 2004-05 = 100. b For a definition of the gross value of farm production see table 21. c Gross value of farm production less increase in assets held by marketing authorities and less total cash costs. d Gross value of farm production less total farm costs. e Mining industry (ANZSIC subdivision B) only. s ABARE estimate. f ABARE forecast. na Not available. Note:ABARE revised the method for calculating farm price and production indexes in October 1999. The indexes for the different groups of commodities are calculated on a chain weight basis using Fishers' ideal index with a reference year of 1997-98 = 100. Sources:Australian Bureau of Statistics; ABARE. |
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