APPEA: PEFO Shows Economic Outlook Unchanged (Australia)

The “PEFO” shows little has changed in the two weeks since the release of the Treasurer’s Economic Statement. Released today, the Pre-Election Economic and Fiscal Outlook 2013 still shows an underlying estimated cash deficit of $30.1 billion for 2013-14, and the fiscal outlook is for a return to budget surplus in 2016-17.

The Economic Statement and the PEFO both noted that weakening world growth and falling world commodity prices are leading to lower terms of trade. But the PEFO forecast further downward revisions on commodity prices due to lower Chinese demand.

The volatility in commodity prices has also significantly curtailed the outlook for investment in the resources sector. Following sharp falls in commodity prices in the middle of 2012, firms sought to reduce their capital spending. This was done by delaying or cancelling projects under consideration and by containing costs and reducing investment in new capital.

LNG investment is expected to remain elevated over the next year, as many projects are yet to be completed. But construction is expected to slow significantly as these projects move towards completion. Investment could also fall more sharply than expected, particularly if future potential projects fail to proceed.

The forecast unemployment rate remains at 6.25 per cent for the next two years, before dropping to 5 per cent in 2015-16. Nominal GDP (i.e. GDP before inflation) is now forecast to grow by 3.75 per cent in 2013-14 and 4.5 per cent in 2014-15, well below its 20-year average of 6.5 per cent.

Since the 2013 Economic Statement, changes to the underlying cash balance reflect updated parameters, such as a lower exchange rate, affecting both payments and receipts and a higher European carbon price impacts tax receipts. In total, tax receipts have been revised up by $70 million in 2013-14, $155 million in 2014-15, $190 million in 2015-16 and $175 million in 2016-17.