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1 AUSTRALIA
2003 IN REVIEW Grant scheme. In 2003, without the
AUSTRALIA
Real GDP grew by 3% in 2003, effects of the top-up and with
compared with 3.6% in 2002. This mortgage interest rates on the rise,
mild downturn was due, in the main, growth in dwelling investment has
to a sharp deterioration in the balance fallen, but the level of investment
between export and import volumes. remains historically high. Real
Contributing to this deterioration were business investment increased
drought-related shortfalls in significantly in 2003 (up 10.3%), with
agricultural exports, generally weak the major positive factors being low
growth in world demand for real interest rates, high rates of
Australian products and strong real profitability, and tightening capacity
appreciation of the Australian constraints in some sectors.
currency. Through the year, Public final demand is dominated
unemployment averaged 5.9% of the by government consumer spending—
labour force and core inflation wages of public servants and current
remained low. spending on goods and services.
Policy debate in 2003 focused on a Government consumption is growing
variety of issues, including strategies faster than the economy as a whole,
boosted by a large-spending program
Pacific Economic Outlook
for supporting drought-affected
rural Australia, the appropriate- on defence, border protection and
ness of monetary policy settings, and airport security.
the challenges of a rising exchange Export volumes fell by 2.1% in
rate. There will be a federal election in 2003, while imports were up 11.6%.
2004 (most likely towards the end of The fall in exports reflects weak work
the year), likely to re-focus debate on demand, little or no growth in
taxation and spending on defence, international tourism, the impacts of
health and education. drought on agricultural exports, and
Real private consumption grew by strong real appreciation of the
4.3% in 2003 (4.2% in 2002). Australian dollar. The increase in
Underlying the strength in consumer imports in 2003 mostly reflects strong
PHILIP D. ADAMS demand has been strong growth in growth in import-intensive elements
Centre for Policy Studies, household wealth fuelled in the main of domestic demand and real
Monash University by substantial rises in housing prices. exchange rate appreciation.
Solid growth in employment has been The deterioration in the balance
another positive factor. between export and import volumes
Dwelling investment increased by moved the trade account balance
around 6% in 2003 after rising by over further into deficit. In 2002, Australia
20% in 2002. The surge in 2002 was had a trade deficit worth around 1.3%
partly driven by low mortgage rates, of GDP. In 2003, that had widened to
supplemented by the once-off effects a deficit worth about 3% of GDP.
of a top-up to the First Home Owners Reflecting the deterioration in the
GDP growth CPI inflation Export growth
4 12
4
3 8
% 4
2 2
0
1
0 -4
0
02 03 04 05 02 03 04 05 02 03 04 05
10
Pacific Economic Outlook
trade account balance, the deficit on rate differential, the strength of the OUTLOOK FOR 2004 AND 2005
current account rose from 4.3% of world economy and the position on The key assumptions underlying our
GDP in 2002 to 6% in 2003. the commodity price cycle. However, forecasts for 2004 are
Employment increased by 2.3% in between the start of 1999 and the little change in real interest rates
2003, following a rise of 2% in 2002. middle of 2002, the traditional rules steady cyclical decline in housing
This precipitated a fall in the average seemed not to apply: the Australian investment through the year
unemployment rate from 6.3% in dollar fell when the global economy resulting in a year-on-year decline
2002 to 5.9% in 2003. Headline CPI- grew strongly and then remained low of 4.9%, coupled with an increase
inflation was steady at 3% in 2003. when the global economy weakened of 4.8% in real private business
Much of the inflation has come from even though commodity prices were investment
increased prices in domestically relatively strong. The major factor growth in real public final demand
focused sectors—housing, health influencing the Australian dollar of 2.3% (the spending surge in
services and fresh food. On the other during this period appeared to be the 2003 appears to be over, with the
hand, the rising nominal value of the strength of the US dollar. Regardless Federal Government preparing for
Australian dollar has seen prices of of the fundamentals, the Australian tax cuts in the lead up to a second-
imported consumption goods fall. dollar was out of favour. half election)
The Reserve Bank is slowly raising Since the middle of 2002, the gap improvement in Australia’s terms of
interest rates back to neutral levels. between commodity prices and the trade of around 2%, compared with
The official cash rate, which was held Australian dollar has closed and 3.7% in 2003
at 4.75% between the middle of 2002 investors are taking notice of the fact a strong pick-up in Australian
and the third quarter of 2003, has now that Australian interest rates are well exports, with a robust rural
been increased to 5.25%, with a above most international rates. As a rebound coupled with increased
further increase of 0.25 percentage consequence, the Australian dollar mining exports
points likely before the middle of increased significantly in value. little change in the current high level
2004. Against the Trade Weighted Index, the of oil prices until mid year
Australia experienced one of the Australian dollar rose in value by little change in the value of the
severest and most widespread almost 30% between the middle of currency from current levels
droughts on record throughout most 2002 and the end of 2003, while (TWI = 60 and US/AUS = 0.75).
of 2003. Current estimates indicate against the US dollar the increase was Overall, GDP growth will pick up
that the drought reduced agricultural almost 40%. In real terms, the increase to 3.8% in 2003, supported by a
output on average by almost 30% in was of a similar magnitude, implying strong improvement in the balance
the 2002–03 (July–June) financial a significant deterioration in between export and import volumes.
year. This was enough to remove competitiveness for Australia’s traded Partly offsetting this factor are
almost 1 percentage point from goods industries. This has slowed the • a fall in growth in dwelling
Australia’s GDP growth rate. The improvement in the current account investment (–4.9%, compared with
drought is now over in most areas. deficit which would otherwise come 5.9%) and
However, some shortfall in agricultural from a recovery in rural exports and a a fall in growth in business
production is still likely in the first half general pick up in world demand. On investment (4.8%, compared with
of 2004 before a full recovery takes the positive side, though, a stronger 10.3%).
place in the second half of the year. currency reduced inflationary The forecast improvement in net
Historically, the value of the pressures, which eased the pressure on trade volume is expected partly to
Australian dollar has been determined the Reserve Bank to further raise arrest the rate of deterioration in the
by economic fundamentals: interest interest rates in 2004. current account balance. In 2004, the
current account deficit is valued at
4.9% of GDP. The forecast for CPI-
Six % again! inflation in 2004 is 1.9%. For 2005,
-8
real GDP growth is expected to be
Australia’s current account deficit
reached 6% of GDP in 2003. However, lower than in 2003 (2.4% compared
as the chart shows, this is not an -6 with 3.8%), but with no improvement
unusual event, with our forecasts in the current account deficit as a
pointing to a mild reversal in 2004. -4 share of GDP.
-2
Current account deficit (% of GDP)
0
84 87 90 93 96 99 02
11
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