australian budget analysis
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Services exports are expected to show a weak recovery in 2003-2004. Services exports are yet tp fully recover from recent shocks, including the collapse of Ansett and terrorist attacks. More recently, security concerns surrounding travel during the war in Iraq, and the outbreak of SARS, are likely to weigh heavily on the outlook for services exports.
Exports of non-rural commodities, which account for the largest share of Australia's exports, are forecast to pick up in 2003-04, despite subdued trading partner growth. This reflects incremental increases in mining capacity and solid demand from key buyers, despite increasing competition. The mining sector has enjoyed very high levels of profitability in recent years which, combined with high commodity prices in Australian dollar terms, has seen a boom in mining investment. However, major increases in new capacity are not expected to flow through to export volumes until at least 2004-05.
Imports
Imports are forecast to increase by around 6 per cent in 2003-04, following growth of around 13 per cent in 2002-03. Slower growth of imports in 2003-04 largely reflects the expected slower growth of domestic demand. There is also likely to be a fall in aircraft imports. The aviation industry's upgrading of its fleet of civil aircraft is expected to continue into 2003-04, but expenditures are likely to be lower than in 2002-03. Imports of services, particularly tourism services, are likely to remain subdued over the forecast horizon because of health and security concerns. Working in the other direction, the appreciation of the exchange rate will tend to support import volumes in 2003-04.
Taken together, the trade forecasts imply that net exports will subtract around 0.25 of a percentage point from economic growth in 2003-2004, following an expected 2.75 percentage points subtraction from growth in 2002-2003.
The terms of trade
The terms of trade is expected to increase in 2003-04, supported by an ongoing decline in the price of imported goods. While export prices are likely to remain subdued, weak global economic conditions, competitive pressures and ongoing productivity improvements in information and communications technology goods (ICT) should continue to place downward pressure on international prices.
Commodity prices have remained firm over the past year with a small pick-up in the prices of some rural commodites offsetting the weakness in non-rural commodities price, particularly base metal prices. Oil and gold prices have also increased, although prices have fallen somewhat in the past month. The prices of other exports have been subdued, in line with weak export demand.
The good performance of the terms of trade during a period of global economic weakness has provided an important buffer for the economy. The cumulative increase in the terms of trade over the past four years has been over 10 percent, with futher increases expected in 2002-03 and 2003-04.
Labout market and unemployment
Growth in employment is expected to slow through 2003-04, in line with slower growth in the non-farm economy. Rural employment is forecast to pick up if the drought breaks, but a full recovery may take some time. Employment growth is forecast to be 1¾ per [next page]