The overwhelming good news from the federal government’s mid-year economic update yesterday wasn’t news on reduced deficits, lower debt and stronger growth.
That’s not to say they are not important. They are, as they measure the factors at work that will have produced the best part of the forecast for hundreds of thousands of Australians.
No the big news was that unemployment will now peak, according to the government, much lower than forecast in May at 6.75% in the first half of next year.
That means the toll of unemployed people is expected to be around 250,000 fewer than forecast at the time of the May budget.
Still, around 100,000 extra people stand to lose their jobs between now and mid way through next year.
The government forecast in May that unemployment would peak at 8.5% in the 2011 financial year.
Since then the jobless figures from the Australian Bureau of Statistics has shown the unemployment rate stuck around 5.7%-5.8% since March-April.
Now the mid year economic and fiscal outlook (known as MYEFO) predicts unemployment will peak this financial year instead of the next.
The peak of 6.7% will fall back to its current level by 2012-13.
The number of jobless will continue to rise because the economy will not be growing fast enough to firstly absorb growth in the workforce, and secondly, start reducing it.
But as demand gradually rises, jobs growth will grow and then unemployment will peak and then start falling.
The smaller toll of jobless will mean higher retail sales, house sales, Government tax revenues and a quicker end to the deficit and lower debt.
That’s if there’s no stuttering or slowdown in the global economy in 2010, which is still a real possibility.
Economic growth will be 1.5% this year (a 2% increase on the May forecast), 2.75% next year and then there will be a more moderate recovery in the following years of 4% rather than 4.5% because growth is recovering faster than anticipated and therefore being brought forward.
Treasury also anticipates inflation will remain moderate, bottoming out next year at 1.5%, before starting to rise.
The International Monetary Fund last week reiterated its prediction that Australia’s economy will grow by 0.7% in calendar 2009 and 2% next year.
Federal Treasurer Wayne Swan said in a statement yesterday: "The improved economic outlook reflects the effectiveness of monetary and fiscal stimulus in Australia, and the stronger global recovery.
"Despite the improved outlook the global recession has still had a marked effect on the Australian economy and challenges remain."
The budget deficit forecast was little changed at $57.7 billion for 2009-10, but as tipped by some analysts, it will fall sharply this financial year to around $46.6 billion and then to around $16 billion in 2012-13, before being back in balance in 2015-15.
But if China and Asia continue growing strongly, that could be achieved before then as employment grows and company profits rise.
A big imponderable will be the impact of any emission trading system.
Debt will fall; net debt will now peak at 10% of GDP in 2013-14, at around $153.2 billion, or about $50 billion that it forecast in May.
Mr Swan said the impacts of the global recession still mean forecast tax receipts remain $170 billion lower over the next four years than forecast at the time of the 2008/09 budget.
He was far more optimistic than he has been, but as the current bout of nerves on the markets shows, there’s still no certainty that the impact of the credit crunch and recession have gone away completely.
Mr Swan warned the economy is expected to continue to operate below capacity for some time and unemployment is still expected to rise.
"The decline in the terms of trade and reduced hours worked is expected to drag on domestic incomes, resulting in the weakest growth in nominal GDP in almost 50 years, and business investment and private demand are forecast to contract this financial year.
"If not for the direct impact of the fiscal stimulus, Australia would have experienced a technical recession and the economy would have gone without growth for two consecutive years, in both 2008-09 and 2009-10.
"The stronger economic outlook has resulted in increased tax revenues across the forward estimates. Notwithstanding this improvement, the impacts of the global recession still mean forecast tax receipts remain $170 billion lower than forecast at the time of the 2008-09 Budget."
He said exports will be down by around $55 billion this financial year, driving a fall in our terms of trade (plus the added, unwanted bonus of the impact of the higher value of the Australian dollar).
"Because the impact of stronger economic activity will take time to be reflected in tax receipts, the forecast for the underlying cash deficit in 2009-10 is largely unchanged from Budget at $57.7 billion (4.7 per cent of GDP). However, in the three years from 2010-11 to 2012-13, the expected underlying cash deficit has improved by an average of 1 per cent of GDP each year.
"Net debt in Australia is now expected to peak at 10.0 per cent of GDP in 2013-14. This is lower than the 13.8 per cent peak forecast at Budget, and represents an improvement in net debt of around $50 billion compared to Budget.
"The Government’s strategy to return the Budget to surplus as the global economy recovers will ensure Australian Government net debt remains considerably lower than any major advanced economy.
"Net debt for the major advanced economies is expected to reach 93 per cent of GDP by 2014 and their
