Chapter 2: The Economy

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Chapter 2: The Economy

The NSW economic outlook has strengthened, with momentum picking up through 2013-14. A faster and stronger move towards growth led by non-mining sectors of the economy is now expected, with above-trend economic growth forecast in both 2014-15 and 2015-16.
This compares to a modest improvement in the global outlook and the still subdued though improving national outlook.

New South Wales’ economic strength is being underpinned in the short term by household consumption, strong dwelling investment and state public infrastructure investment. Over time, stronger demand is expected to lead to improved business confidence, and recovering

non-mining business investment.

NSW is well-placed to benefit as the national mining-investment boom unwinds. The shift to stronger growth should be less difficult than nationally over the next few years, partly because NSW mining investment has already slowed sharply. Existing spare productive capacity in the economy means above-trend growth should be sustained with contained wage and price growth.

Employment growth has been stronger, and is expected to keep accelerating over 2014-15 and 2015-16. An expected inflow of labour from other states and a modest improvement in the participation rate means existing spare capacity will be sustained for a time, before being absorbed by ongoing above-trend economic activity.

The NSW Government is contributing to this strong performance. The Building the State package has encouraged new dwelling investment, while the Jobs Action Plan has supported employment. At the same time, state-led public infrastructure spending will continue to provide solid support to growth.

The national economic outlook is marginally better than Half-Yearly Review, though
below-trend growth is still expected over the next two years. Weighing on growth will be declining mining investment, a delayed recovery in non-mining business investment and fiscal consolidation efforts by governments, particularly the Commonwealth.

Modest improvements in global growth are expected over the next 18 months. The recovery in advanced economies should strengthen while emerging economy growth stabilises. Australia’s major trading partner growth is expected to be marginally above its long-run average over the next two years.

Overall, risks appear more balanced than at Half-Yearly Review. A key uncertainty to the forecasts is the timing and profile of the recovery in NSW non-mining business investment. There are further downside risks from heightened consumer caution, a persistently higher than expected exchange rate and the impacts on the NSW economy of slower growth in the rest of Australia. However, higher than expected dwelling investment and associated positive flow-on effects to the broader economy could see stronger than expected outcomes.

2.1 Introduction

Momentum has been building steadily through 2013-14 in New South Wales and points to a resurgent NSW economy over the next two years, after a subdued performance over the last decade. The State is well-placed to grow as the national mining-investment boom unwinds.

The global economic outlook for the next two years has strengthened modestly in recent months. Though slightly improved from Half-Yearly Review, the national outlook remains subdued. National growth is expected to be below-trend and remain uneven across sectors and states, dampened by a significant slowdown in mining investment and the Commonwealth government’s fiscal consolidation efforts. Firming household consumption and dwelling investment will provide some support initially, before a pick-up in non-mining business investment and exports.

In contrast, the NSW economic outlook is more positive, with the shift to stronger growth, led by non-mining sectors, now brought forward. Growth in NSW Gross State Product (GSP) is expected to increase to 3 per cent in 2013-14 and remain at this above-trend rate in both 2014-15 and 2015-16. Household consumption, dwelling investment and non-mining business investment will propel above-trend economic growth and drive strong gains in employment.

Economic Performance and Outlook(a)






New South Wales





Real state final demand


Real gross state product









Unemployment rate (b)


Sydney CPI (c)


- through the year to June quarter (c)



Wage price index



Nominal gross state product


  1. Per cent change, year average, unless otherwise indicated.

  2. Year average, per cent.

  3. 2014-15 includes a ¾ percentage point detraction due to the carbon tax abolition; 2014-15 and 2015-16 include a ¼ percentage point contribution from tobacco excise increases.

Source: ABS 5206.0, 5220.0, 6202.0, 6401.0, 6345.0 and Treasury.
The 2014-15 Budget provides detailed forecasts for the Budget year and 2015-161, as set out in Table 2.1 above. Projections are applied for 2016-17 and 2017-18 based on past and prospective medium term economic trends. Economic forecasts and projections affect state revenue more significantly than expenses. In particular, GST, property transfer duty, mining royalties and payroll tax are sensitive to economic parameters.

2.2 New South Wales Economic Outlook

Recent Developments

Given the recent build-up in momentum, real economic growth in 2013-14 is now expected to be above trend at around 3 per cent, higher than expected at Half-Yearly Review. Recent economic strength has been supported by strong household consumption and public investment. This has more than offset declines in business investment (both mining and non-mining) and weaker than expected dwelling investment in the first half of 2013-14.

Real State Final Demand Growth

Household consumption has been supported by low interest rates and strong wealth effects
from rapid house price growth and sharemarket gains. Dwelling investment picked up strongly in the March quarter 2014 after a weaker than expected performance in the previous six months, the latter owing to poor weather and longer lead times associated with multi-unit developments. Leading indicators (e.g. housing finance and building approvals) point to strong dwelling investment ahead, as the large number of dwelling approvals in the pipeline translates into activity.

Aggregate business investment is expected to be lower over 2013-14. Mining investment has fallen by around 45 per cent through the year to March quarter 2014, more sharply than expected. This has weighed more heavily than anticipated on the business services sector, but the fall in mining investment looks to be largely complete in New South Wales. Non-mining business investment leading indicators (commercial lending approvals, non-residential building approvals) have been broadly improving since mid-2013, although capacity utilisation and investment intentions remain low.

Export growth has been relatively subdued, mostly because of falls in manufactured exports and significant falls in rural exports due to drought. Strong growth in non-rural commodity exports (led by coal) and solid growth in service exports have partially offset this.

There are signs the labour market is recovering following softer outcomes through 2013, consistent with the recent upturn in domestic demand. Employment has increased since the start of 2014 and the participation rate has stabilised following recent falls. The unemployment rate has fallen, peaking lower and earlier than previously expected.


Against the backdrop of an ongoing modest improvement in the global economy and a subdued national economic outlook, NSW economic growth is forecast to remain at an above-trend 3 per cent in both 2014-15 and 2015-16. In 2014-15, growth will be buttressed by stronger dwelling investment as the substantial pipeline of work to be done translates into activity, together with contributions from public investment and household consumption. Non-mining business investment will start to gather speed.

This momentum is expected to be maintained in 2015-16. Strengthening household consumption growth, in turn underpinned by stronger employment and wage growth, will provide solid support for economic growth. Dwelling investment is forecast to moderate, though remain solid, as the pipeline of housing projects is worked through. Non-mining business investment, especially in machinery and equipment, is expected to strengthen in response to stronger domestic and global demand as well as the need for capital renewal following a period of low investment.

NSW mining investment will weigh less on state growth over the next two years since sharp falls have already largely occurred. Export growth is expected to firm over 2014-15 and 2015-16, helped by a moderately lower exchange rate and improving major trading partner growth (see Section 2.3).

Leading indicators of labour demand have improved, suggesting the recent recovery will strengthen into 2014-15. Employment in New South Wales is expected to grow at an

above-trend rate of 1¾ per cent in 2014-15, accelerating to 2 per cent in 2015-16, consistent with continuing above-trend economic growth.
Over 2014-15, the unemployment rate should remain steady at current levels of around
5½ per cent before declining through 2015-16. Initially, existing spare capacity will be sustained by the inflow of labour into New South Wales, given its expected relative economic strength. Over time, this spare capacity will be absorbed by ongoing above-trend employment growth, but is expected to result in only moderate upward pressure on wages and prices over the next two years.

The more positive outlook for the NSW economy relative to national economic prospects is partly because the factors that weighed down New South Wales’ growth during the mining investment boom (rising interest rates prior to the Global Financial Crisis (GFC), a stronger exchange rate and labour and capital being drawn into mining investment projects) have now either largely unwound or are in the process of unwinding. Other points of difference between the NSW and national environments include:

  • state public investment, including projects such as WestConnex, NorthConnex and the North West Rail Link will contribute solidly to NSW growth over the next two years

  • historically low interest rates drawing a stronger positive response from sectors such as household consumption and dwelling investment in New South Wales than elsewhere.
    This reflects this state’s households’ greater interest rate sensitivity due to higher debt levels

  • New South Wales having less reliance on mining investment as a driver of growth and also having already experienced a sharp slowdown in mining and mining-related investment in 2013-14, while a significant part of the national decline is yet to occur (Chart 2.2).

These differences mean New South Wales is much better placed to grow than the national economy as the economic environment changes over the next two years.

Mining Investment (Real) - Share of Output

Nominal GSP growth is expected to pick up steadily from an estimated 3¾ per cent in
2013-14 to 4¾ per cent in 2014-15 before returning to trend growth of 5¼ per cent in 2015-16. This mostly reflects real growth offset by contained domestic price growth and moderate wage growth, together with the impact of movements in the terms of trade.

Risks to the outlook appear more balanced than at Half-Yearly Review. On the downside, risks include consumers reverting to more cautious behaviour as growth in wealth moderates, persistently high inflation resulting in rising interest rates, and slower growth in the rest of Australia impacting New South Wales more than expected, especially on business services.

The exchange rate and rate of recovery in non-mining business investment will affect the timing of the return to stronger GSP growth. The degree and extent of labour and capital flows from the mining states back to New South Wales will have implications for population growth and wage and inflation pressures. However, a stronger than expected recovery in dwelling investment and the possible flow-on effects to the broader economy could see stronger outcomes than forecast.

Detailed Economic Outlook – 2014-15 and 2015-16

Household Consumption

Household consumption growth strengthened to above-trend rates in both the December quarter 2013 and March quarter 2014 despite weak employment growth in the second half of 2013 and continuing soft wage growth.

Household consumption growth is expected to remain strong in both 2014-15 and 2015-16, buttressed by low interest rates, ongoing wealth effects and stronger employment and wage prospects.

Growth in House Prices and Real Retail Turnover - NSW

Dwelling Investment

Leading indicators of dwelling investment have been at highs not seen since the early part of last decade. A slower than expected start in 2013 reflected poor weather and a current housing cycle more weighted towards high-rise multi-unit dwellings than usual (which have longer and more variable lead times relative to detached housing). Following this slow start dwelling investment rebounded strongly in early 2014.

Residential Work Yet to be Done (Real) – 4 quarter moving average

Dwelling investment growth is forecast to strengthen further in 2014-15 and remain solid in 2015-16. As Chart 2.4 shows, there is an extensive pipeline to work through, especially in
multi-unit housing, which is expected to result in burgeoning activity over the next two years. The resultant substantial addition to the dwelling stock is expected to help alleviate pent up demand (the gap between underlying requirements and cumulative dwelling completions, as discussed in Box 2.1).

Government programs targeted toward new dwelling investment (such as the Building the State package) have laid the foundations for this resurgence in dwelling investment, with further support to activity to come from low interest rates and rental vacancy rates, strong established house price growth, solid consumer confidence and household income growth.

Box 2.1: NSW Housing

The last cycle in NSW dwelling completions (from its low in 2001 to the subsequent low in 2010) was longer than any since the current Australian Bureau of Statistics series began in 1984.

The length and depth of the downturn left New South Wales with an undersupply of housing relative to demand (Chart 2.5).

The contraction in dwelling completions reflected some persistence in excess housing supply (after the peak in the previous boom), as well as an extended period of rising interest rates just prior to the GFC. The GFC also saw a decline in lending.

By contrast, underlying demand remained, and continues to remain, firm. Demand is determined by population growth and household formation patterns. In turn, these reflect a
long-term trend towards smaller household sizes.

Preconditions are now more conducive to a sustained upturn in housing construction as evidenced by tighter rental markets and strong established house price growth.

These market signals, coupled with low interest rates and State government initiatives to boost new housing (such as the Building the State package) have induced a pick-up in housing activity, with leading indicators significantly improving over the last 18 months. Recent data suggests that the upturn in investment implied by the strength in leading indicators is now starting to eventuate.

Underlying Dwellings Requirement

Business Investment

In the early part of 2013-14 underlying business investment (i.e. excluding the purchase and sale of existing assets) fell sharply. This has been led by precipitous declines of around 45 per cent in mining investment through the year to date (Chart 2.6). Though mining investment comprises a relatively small share of overall investment in New South Wales (peaking at around 13.5 per cent in 2011-12, compared to the national peak share of around 43 per cent in 2012-13), this sharp decline did adversely affect overall growth.
Mining Capital Spending – New South Wales and Australia

In the last few years NSW engineering construction has been dominated by investment in coal mining and related projects. Mining investment in New South Wales peaked over a year ago and has fallen significantly through 2013-14 as coal projects have been completed. Unlike the resource states where there is an investment tail from large liquefied natural gas (LNG) projects, there is little in store for New South Wales going forward. As such, engineering construction is forecast to remain weak over the next two years, as strengthening non-mining activity is offset by further, albeit more moderate, declines in mining investment.

Non-mining business investment growth is expected to remain firm over 2014-15 before accelerating in 2015-16. This is in line with forecasts of a stronger household sector, and improving global demand for non-mineral exports. Further, there is a need to renew capital stock following a period of underinvestment and an anticipated need to expand in the future as current spare capacity is used up. Low interest rates and a moderately lower exchange rate should support growth in non-mining business investment. Freed up labour and capital from the national decline in mining investment will make it easier for non-mining businesses to invest.

Non-mining business investment seems to be gaining momentum, however capacity utilisation remains low as do investment intentions. Nevertheless, a pick-up over the next two years is forecast as non-mining investment recovers from its underperformance of the last few years.

Supported by a steady build-up in the pipeline of work, the level of non-residential building construction activity is now expected to be larger over the forecast period. While it appears that some activity has been brought forward, growth should remain robust in both 2014-15 and
2015-16. After contracting in 2013-14, growth in machinery and equipment investment is forecast to expand in 2014-15 with strong growth expected for 2015-16 as spare capacity is used up. The forecast improvement is nonetheless very modest in the context of low levels of investment in recent years (Chart 2.7) and suggests a potential upside risk to economic growth.
Non-Mining Investment Share of Nominal GSP

Public Final Demand

State public infrastructure investment, including on projects such as WestConnex, NorthConnex, the North West Rail Link and major hospital upgrades and redevelopments will provide firm support for New South Wales economic activity over the next two years (see Chapter 1 of Budget Paper 4).

However, while aggregate public demand is expected to grow solidly over the next two years, its contribution to economic growth is expected to be, on average, somewhat less than in the past. The robust contribution from State public investment is expected to be offset by continued expense restraint as part of the Government’s prudent fiscal strategy. At the same time, fiscal consolidation by the Commonwealth will also weigh on public spending growth in New South Wales.

Net Exports

Recent export growth has been relatively subdued due to significant falls in rural exports caused by drought and falls in manufactured exports. Strong growth in resources exports (led by coal) and service exports has provided some offset.

Conditions are in place for a solid increase in exports over the next two years. A moderately lower exchange rate and improving major trading partner growth should foster solid growth in manufactured and service exports over the next two years. Following a drought affected 2013-14, rural commodity exports should recover. Strong growth is expected for resources exports, despite some downward revisions to coal export volumes due to weakness in global prices.

In the last two years imports have slowed, reflecting the unwinding of the resources investment boom as well as cost pressures from the falling exchange rate. Also, net tourism has swung in New South Wales’ favour. Solid import growth is expected over 2014-15 and 2015-16, in line with stronger household consumption and higher capital imports as non-mining business investment recovers.

Labour Market

Early 2014 has shown signs of a turnaround in the labour market following softer outcomes through 2013. Employment has improved, the participation rate has stabilised and the unemployment rate has been falling.

Employment in 2014-15 is expected to grow at an above-trend pace of around 1¾ per cent, before accelerating further to around 2 per cent in 2015-16. This growth will be underpinned by improving activity in labour intensive sectors, such as dwelling construction, retail, tourism and manufacturing. The outlook is also consistent with the upturn in leading employment indicators (albeit from low levels) as well as in overall economic activity since the end of 2013. The Government’s Jobs Action Plan will also continue to support employment.

The unemployment rate is expected to remain at current levels of around 5½ per cent through 2014-15, before falling consistently through 2015-16. The unemployment rate is expected to remain broadly stable in the near term, despite stronger employment growth. This reflects increased participation and increased labour supply as employees are drawn into New South Wales given its relative economic strength. This will sustain existing spare labour capacity in the near term as evidenced by the currently low levels in the employment to population ratio (Chart  2.8).

Employment to Population Ratio – New South Wales and Australia

Box 2.2: Workforce Participation

Recent NSW labour market outcomes indicate that the long-expected structural decline in the participation rate, driven by population ageing, may have begun. Subdued labour market conditions in the second half of 2013 saw the NSW participation rate fall by more than 1 per cent between May and December, around double the national fall. This was mostly driven by declines among the over 55s age group with some contribution from 15-24 year olds.
Treasury estimates that around 40 per cent of the fall in total participation is due to a discouraged worker effect. The rest is likely a demographic impact from the exit of older workers, whose participation has been surprisingly buoyant post GFC.
Chart 2.9 compares trend participation with Treasury’s projected underlying participation rate. Age specific trends and demographic effects (e.g. ageing), result in an expected participation peak of 63.7 per cent in 2016-17, after which ageing is projected to gradually pull the participation rate down.

NSW participation

The GFC ended a long-running upward trend in NSW participation driven by strong employment and wage growth. Since then participation has moved around the long term projection in response to labour market conditions, but the most recent slump stands out both in terms of its size and demographic composition.

As new entrants into the workforce, the young are disproportionately impacted by weak labour market conditions since, when the economy slows, firms are reluctant to recruit. The recent slump in employment growth saw the participation of 15-24 year olds fall below their projected underlying level.

Chart 2.10 shows participation among those of
prime-working age (25-54) has been relatively stable since it bottomed out in early 2010, coinciding with the peak in retrenchments.

NSW participation of 25-54 age group

Wealth is a key factor for participation among the over 55s group. Chart 2.11 shows wealth increases (drawn from property and share market prices) tend to be followed by participation decreases. The reduction in wealth from the GFC resulted in participation persistently above the underlying rate among this group.
The recent wealth increases, combined with weaker labour market conditions, have seen over 55s participation fall below the projected underlying rate for the first time since the GFC.

NSW participation of 55+ age group

The recent high exit rate of over 55s coincides with wealth levels exceeding their pre-GFC highs and is consistent with the realisation of previously deferred retirement plans. This movement is the first indication of the projected ageing-driven downward trend in participation, as the baby-boomers transition into retirement.

Wage Price Index

Wage growth (as measured by the Wage Price Index) has slowed sharply over the last year to
2.6 per cent through the year to the March quarter 2014, among the lowest rates seen since the series began in 1997. The slowdown in wage growth has been broad based across industries, but particularly marked in professional services where the slowdown in labour demand has been especially pronounced. Slower wage growth reflects spare labour market capacity and the ongoing impacts of the State government’s wages policy.

As a result, relative to Half-Yearly Review, wage growth has been revised down slightly across the forecast period, consistent with persisting spare capacity in the labour market.

Wage growth is expected to remain subdued at 3 per cent in 2014-15 before firming in 2015-16. Private sector wage growth is expected to pick up as the unemployment rate and terms of trade stabilise, and the economy grows at above-trend rates. Public sector wage growth is expected to remain well contained at around 2½ per cent, in line with the Government’s wages policy.


Recent inflation outcomes have been higher than expected and both headline and underlying inflation have moved towards the upper end of the RBA target band. Consumer price inflation reflects pressures in both the tradeable sector (primarily world supply and demand factors and the exchange rate) and non-tradeable sectors (including business capacity utilisation, regulatory policy, market competition and wage costs). In the second half of 2013, both tradeable and
non-tradeable inflation were higher than would be expected given exchange rate movements and labour costs. A faster than expected pass-through of higher input costs from the depreciating exchange rate may have been at least partially responsible for this. March quarter 2014 data suggests that the expected easing in non-tradeables price growth is starting to appear.

Looking forward, inflationary pressures are expected to moderate. Spare labour market

capacity will help contain wage pressures and below-trend economic growth has left significant spare capacity, which should put downward pressure on inflation in the non-tradeable sector.
In contrast, the expected further depreciation of the exchange rate over the forecast period will put some upward pressure on tradeables prices.

Headline inflation over the forecast period is significantly affected by a number of Commonwealth government policy measures. Sydney CPI growth is expected to fall to

2¼ per cent in 2014-15 reflecting the impact of the abolition of the carbon tax, partially offset by the impact of the staged increases in the tobacco excise. Sydney CPI growth is then forecast to rise to 2¾ per cent in 2015-16, in part due to a further rise in the tobacco excise.

2.3 National and Global Economic Outlook

Australian Economy

The national economy has been improving through 2013-14, though mostly as a result of strong resource export growth. Household consumption has been firm, supported by low interest rates and the boost to household confidence from strengthening house prices and sharemarket gains. A lower exchange rate has helped boost exports, particularly resources, while service and manufactured exports improved in the second half of 2013. After weaker than expected growth in the last two quarters of 2013, dwelling investment rebounded in the March quarter 2014, while mining investment has been coming off its peaks. Non-mining business investment remains subdued with further falls in the March quarter 2014, though it appears that investment intentions for 2014-15 have firmed somewhat recently. It appears businesses are still waiting for a sustained improvement in demand before increasing investment and hiring.

The transition away from mining-investment led growth towards growth driven by other sectors of the economy has begun. There are positive signs that the composition of growth seems to be shifting towards exports and the household sector. However, the path is likely to be uneven.

The impending intensification of the decline in mining investment, a drawn out recovery in nonmining business investment and the impacts of fiscal consolidation, especially by the Commonwealth government, will all weigh on growth.

On balance, these competing forces are expected to result in below-trend growth in both 2014-15 and 2015-16. Nominal economic growth is also forecast to remain below trend, reflecting expected ongoing declines in the terms of trade and weak wage growth.

While growth in 2013-14 is now expected to be stronger than forecast at Half-Yearly Review, this momentum is not expected to carry through into 2014-15. The drag on economic growth from receding mining investment is expected to intensify. Export growth should ease briefly as farm output is forecast to decline due to drought. Offsetting these impacts will be an expected acceleration in household consumption and dwelling investment. Public demand should also provide support to growth, though less than it has historically. Non-mining business investment is forecast to slowly start recovering.

In 2015-16, GDP growth is expected to improve as the transition to broader-based economic growth progresses. Export growth is forecast to pick up as farming recovers and LNG exports begin. Household consumption growth is also expected to improve to around trend due to a strengthening labour market, while dwelling investment should remain solid. Also, non-mining business investment, led by machinery and equipment investment, is forecast to advance strongly in response to strengthening domestic demand. Improving global conditions, moderate terms of trade declines and a commensurately lower exchange rate, will also be sources of support.

Nevertheless, growth is still expected to remain slightly below trend. Weighing on growth will be fiscal consolidation, particularly by the Commonwealth government and an even steeper decline in mining investment, especially as several large-scale LNG projects are completed.

There are signs the national labour market is recovering from its 2013 lows, with employment growth having started to improve in early 2014. The unemployment rate also appears likely to peak below previous expectations. Further improvement in the labour market on the back of strengthening domestic demand should help support household consumption going forward.

While the outlook is for modest, but improving growth, the drift away from mining investment as the main growth driver is unlikely to be smooth and there are significant risks to the outlook. Uncertainties surround the profile for mining investment and the timing and pace of the recovery in non-mining business investment. A more significant growth gap could appear were the mining investment decline to be sharper, or the recovery in non-mining business investment delayed further than currently anticipated. The recent slump in consumer confidence will also cause concern if it continues.

Global Economy

Global economic growth has begun strengthening over the second half of 2013. The US economy picked up and the Euro zone appears to be emerging from recession. Despite Japan’s growth slowing, non-Japan Asia improved modestly as have other emerging economies. In 2013, Australia’s major trading partner growth was around its long-run average.

The momentum building through 2013 is expected to continue over the next two years.

The International Monetary Fund (IMF) forecasts global growth to pick up to around
3½ per cent in 2014 and 4 per cent in 2015 (slightly above the pre-GFC trend rate).

World Economic Prospects

Per cent change in real GDP, by calendar year
Note: Major Trading Partners growth rates are calculated using national merchandise export weights of Australia’s top 26 export destinations.

Source: IMF World Economic Outlook April 2014 and Treasury.

While prospects for 2014 remain largely unchanged from the Half-Yearly Review, growth is now expected to derive more from the advanced economies, with emerging economies making less of a contribution. Fiscal consolidation will be less of a drag, debt sustainability concerns are receding for now and the banking system’s capacity to fund growth is being restored. Australia’s major trading partner growth is expected to remain at, or be slightly above, its long run average over the following couple of years.

The major impulse to increased global growth is coming from the United States, as the economy regains speed after a temporary slowdown due to poor weather in early 2014. The IMF forecasts the Euro zone to expand in 2014 and for growth to improve further in 2015. In Japan, overall growth is expected to slow from 1¼ per cent in 2014 to 1 per cent in 2015.

Economic growth in China has stabilised recently, and is expected to remain around the official target of 7½ per cent over the next year. It is expected to moderate a little further in 2015, as the economy continues adjusting towards growth led more by household consumption than infrastructure investment. This relatively benign outlook for China is predicated on the assumption that the authorities succeed in reining in credit growth, rebalancing activity away from investment to consumption, and further broadening market forces across the economy.

The balance of risks to the global economic outlook remains to the downside, but appears more balanced than at Half-Yearly Review. Downside risks include the danger of growth not emerging and potential deflation in the Euro zone, the impacts on activity of entrenched low inflation expectations in Japan, increased vulnerabilities of indebted emerging economies, the success of the Chinese authorities in managing emerging credit pressures, and geopolitical tensions such as those currently involving Russia and Ukraine. Upside risks include the possibility that the advanced economies, particularly the United States, recover faster than expected.

Medium-Term Outlook

Forecasts are provided for the Budget year and 2015-16 based on exogenous factors such as the strength of the global economy, global commodity prices, climatic conditions, population, and domestic policy settings, as well as endogenous factors such as the state of the inventory, housing and business investment cycles.

Projections are made for 2016-17 and 2017-18 based on medium term economic parameters, and are detailed in Table 2.3.

Economic Projections for 2016-17 and 2017-18
Year average per cent change(a)

(a) Average of outcomes over 2016-17 and 2017-18

(b) 2016-17 Sydney CPI impacted by tobacco excise increase of slightly under ¼ percentage points

1 Economic forecasts are based on data available at June 2014, including results to June 2013 for Gross State Product, to the March quarter 2014 for State Final Demand, the Wage Price Index, and Consumer Price Index, to the September quarter 2013 for population and to April 2014 for the labour force.

Budget Statement 2014-15 2 -

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