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OECD economic outlook 49



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TREASURER

NO. 5 5

EMBARGO 4.00 AM 4 JULY 1991

STATEMENT BY THE TREASURER, THE HON JOHN KERIN, MP

OECD ECONOMIC OUTLOOK 49

The OECD's latest six monthly Economic Outlook has been

released in Paris. It reviews economic performance and

policies in OECD member countries, and projects economic

developments to the end of 1992. It also contains a brief

review of the Australian economy.

The OECD's views on the Australian economy are broadly

consistent with our own, involving a moderately paced

recovery in demand beginning in the second half of 1991. The

recovery will maintain the gains made to date on inflation

and the current account deficit, and lead to a gradual

recovery in the labour market.

There are, however, some areas of difference.

The OECD observes that the recession largely reflects

the reaction of the private sector to checking excess

demand with high interest rates. However, other

factors were also important, including the fall in the

terms of trade, the non-dwelling construction cycle,

the unwinding of the asset price cycle, and the impact

of regional factors in the downturn. COMMONWEALTH PARLIAMENTARY LIBRARY MiCAH

2

non-dwelling construction cycle, the unwinding of the

asset price cycle, and the impact of regional factors

in the downturn.

. The OECD claims that the Government has relaxed

monetary policy because of the recession. This ignores

the very important role played in those decisions over

the past 18 months by inflation and inflationary

expectations.

. Finally, the OECD's claim about the current recession

being 'sharper' but of shorter duration than 1982-83

may be misinterpreted. The fall in GDP has been faster

but smaller than in 1982-83. The falls in domestic

demand and employment are roughly comparable in

magnitude and duration.

For the OECD economies, the OECD Secretariat expects a

moderate pick-up in activity from 0.3 per cent growth in the

first half of 1991 to 2.4 per cent in the second half and

2.9 per cent in 1992. Against this background, OECD

inflation (GNP deflator) is projected to slow from

4.7 per cent in the first half of 1991 to 4.2 per cent in the

second half and 3.8 per cent in 1992.

The OECD emphasises the need for caution in the operation of

monetary policy as recovery gets underway to avoid economies

becoming overheated again. While the OECD notes the role of

automatic fiscal stabilisers in moderating the downturn in

3

activity, Governments are encouraged to maintain the progress

on fiscal consolidation.

The OECD emphasises the need for continuing structural

reforms. The immediate priority in this area remains the

Uruguay Round. The OECD stresses that it is essential to

achieve rapid progress in the large number of fields covered

in the Round, and that the process of reforming agriculture

is of decisive importance for the GATT negotiations.

Attached are:

(a) A summary of the main OECD projections.

(b) The OECD's extract on Australia.

CANBERRA 4 July 1990

CONTACT OFFICER : Mike Callaghan TELEPHONE : (06) 263-3757

S u m m a r y o f p r o j e c t i o n s -

S e a s o n a l l y a d j u s t e d a t a n n u a l r a t e s

1 9 8 9 1 9 9 0 1991 1 9 9 2 1 9 9 0 1991 1 9 9 2

II 1 II I II

P e r c e n t a g e c h a n g e s f r o m p r e v io u s p e rio d

R e a l C .N P U n i t e d S t a t e s 2 .5 0 .9 - 0 . 2 3.1 0 .3 - 1 . 8 2 .7 3 .3 3 .3

J a p a n 4 .7 5 .6 3.5 3 .5 4 .2 3 .3 3 .2 3 .5 3.8

G e r m a n y '1 3 .8 4 .5 2.8 2 .2 4 .5 2 .4 1.8 2.1 2 .8

O E C D E u r o p e 3 .3 2 .8 1.4 2 .4 1.7 1.0 1.8 2 .4 2 .8

T o t a l O E C D 3 .3 2 .6 l . l 2 .9 1.5 0 .3 2 .4 3 .0 3 .2

R e a l t o t a l d o m e s t i c d e m a n d

U n i t e d S t a l e s 1.9 0 .5 - 0 . 9 3 .3 - 0.1 - 3 . 2 2 .9 3.4 3 .3

J a p a n 5 .7 5 .8 3 .6 3 .6 4 .2 3 .3 3 .4 3 .6 3 .8

G e r m a n y '· 2 .7 5.1 3 .2 2 .5 4 .3 3 .5 1.6 2.7 2 .8

O E C D E u r o p e 3 .4 2 .9 1.4 2 .3 1.3 1.2 1.6 2.4 2 .7

T o t a l O E C D 3 .4 2 .5 0 .8 2 .9 1.2 - 0.1 2 .4 3 .0 3.1

I n f la t io n I G N P / C D I ’ d e f la to r !

U n i t e d S t a t e s 4.1 4.1 4 .0 3 .6 3 .7 4 .2 4 .0 3.5 3 .4

J a p a n 1.9 1.9 2.3 1.9 1.5 2 .7 2 .0 1.8 1.8

G e r m a n y '· 2 .6 3 .4 4 .0 4 .2 3.3 3 .9 4 .8 4 .2 3 .7

O E C D E u r o p e 5 .6 5 .8 5 .7 5.1 5 .6 6 .0 5 .4 5.1 4 .7

T o t a l O E C D 4 .4 4 .3 4 .4 3 .8 4 .0 4 .7 4 .2 3.8 3 .6

$ b illio n

C u r r e n t b a l a n c e s

U n i t e d S t a l e s - - 1 1 0 . 0 - 9 9 . 3 - 8 . 7 - 5 8 . 0 - 1 0 8 . 5 1 8 .6 - 3 6 . 0 - 5 7 . 5 - 5 8 . 5

J a p a n 5 7 .2 3 5 .8 4 1 .0 5 2.1 2 8 .3 3 2 .3 4 9 .6 5 1 .8 5 2 .4

G e r m a n y '· 5 7 .2 4 7 .9 - 0 . 3 I I . 1 3 9 .9 - 4 . 4 3 .9 7.8 1 4 .4

O E C D E u r o p e 7 .3 - 0 . 9 - 3 4 . 2 - 1 7 . 3 8 .4 - 3 9 . 8 - 2 8 . 5 - 2 2 . 4 - 1 2 . 2

T o t a l O E C D - 7 8 . 3 - 9 3 . 5 - 2 5 . 8 - 4 7 . 2 - 9 8 .1 - 1 3 . 4 - 3 8 . 3 - 5 2 . 4 - 4 2 . 0

O P E C - 2 . 2 1 3 .7 - 3 1 . 4 - 1 3 . 2 3 7 .5 - 3 9 . 5 - 2 3 . 4 - 1 3 . 3 - 1 3 . 2

N o n - O P E C d e v e l o p in g c o u n t r i e s - 9 . 0 - 1 . 2 - 2 0 . 2 - 2 3 . 7 1 7 .0 - 1 9 . 0 - 2 1 . 4 - 2 2 . 0 - 2 5 . 4

P e r c e n t o f l a b o u r fo r c e

U n e m p lo y m e n t U n i t e d S l a t e s 5 .3 5 .5 6 .7 6 .3 5 .7 6 .7 6 .7 6 .4 6 .2

J a p a n 2 .3 2.1 2 .2 2 .3 2.1 2.1 2 .2 2.3 2 .3

G e r m a n y '’ 5 .6 5.1 5 .0 5.1 4 .9 4 .9 5.1 5.1 5.1

O E C D E u r o p e 8 .5 8 .0 8 .7 9 .0 8 .0 8 .5 8 .9 9 .0 9 .0

T o t a l O E C D 6 .4 6 .2 7.1 7.1 6 .3 7 .0 7 .2 7.1 7 .0

P e r c e n t a g e c h a n g e s f r o m p r e v io u s p e rio d

W o r l d tr a d e · 7.1 5 .0 3.1 5 .8 3 .6 2 .0 4 .8 6.1 6.1

ill A s s u m p t i o n s u n d e r l y i n g t h e p r o je c tio n s i n c l u d e :

- n o c h a n g e in a c t u a l a n d a n n o u n c e d p o lic ie s :

- u n c h a n g e d e x c h a n g e r a t e s f r o m 10 M a y 1991 in p a r t i c u l a r $1 = Y 1 3 8 .7 0 . D M 1 .7 3 .

- D o l l a r p r ic e (O l- .C D fo b i m p o r t s ) fo r i n t e r n a t i o n a l l y t r a d e d o il o f $ 1 9 p e r b a r r e l fo r 91 1. $11 p e r b a r r e l fo r 91 II a n d

c o n s t a n t in r e a l t e r m s t h e r e a f t e r .

- T h e c u t - o l f d a t e fo r o t h e r i n f o r m a t i o n u s e d in t h e c o m p i l a t i o n o f t h e p r o j e c t i o n s w a s 21 M a y 1 9 9 1 .

h i l o r d e f i n i t i o n o f G e r m a n y , s e e b o x . p a g e iii.

c l A r i t h m e t i c a v e r a g e o f th e g r o w th r a t e s o f t h e w o rld im p o r t v o lu m e a n d t h e w o rld e x p o r t v o lu m e .

AUSTRALIA

The Australian economy entered recession towards the middle of 1990. Real GDP dropped by 3.5 per cent (all data at annual rates) in the second half of the year. For calendar year 1990, total domestic demand fell 0.6 per cent, but an improvement in the

trade balance sustained a 1.5 per cent rise in real GDP - a marked slowdown from the 4.6 per cent growth in 1989. The recession largely reflects private sector reac­

tions to the checking of excess demand by very high interest rates since 1989. Cutbacks in household spend­ ing on durables and housing further aggravated the already highly leveraged balance-sheet positions of companies, leading to a drop in inventories and fixed

investment. Unemployment has risen rapidly, nearing 10 per cent of the labour force by April 1991, some 3'/i percentage points higher than a year earlier. A drop in the terms of trade in 1990 (equivalent to 1 '/ι to 2 per cent of GDP) exacerbated weak domestic demand conditions. Notwithstanding higher import prices, the rise in the consumption deflator eased to the

5 to 5'/: per cent range in the second half of 1990. But,

with profits under severe pressure and a pronounced drop in farm prices, the GDP deflator rose by less than 4 per cent. Notwithstanding an improvement in the trade balance, rising net payments of investment

income kept the current account deficit for 1990 at 43 /* per cent of GDP. Monetary policy has responded to the onset of the recession. Short-term interest rates have been cut eight times since the start of 1990, bringing rates on 90-day commercial paper down to roughly 10'/j per cent in May 1991, compared with more than 18 per cent at end-1989. The yield curve has switched from

being steeply inverted to being essentially flat. Against this background, the effective exchange rate remained remarkably stable through the course of 1990 and into 1991, though at some 5 per cent below its 1989 level. Fiscal policy is projected to be slightly expansionary, taking 1991 and 1992 together. The OECD Secreta­

riat estimates that a large part of the projected drop in the general government’s surplus between 1990 and 1991 reflects the operation of automatic stabilisers. But

AUSTRALIA Demand, output and prices Percentage changes, volume (1984/85 prices)

P riv a te c o n s u m p t io n G o v e rn m e n t c o n s u m p t io n G ro ss fix e d c a p i t a l f o r m a t io n

f in a l d o m e s t ic d e m a n d

* c h a n g e in s to c k b u i ld in g

T o tal d o m e s t ic d e m a n d

E x p o rts o f g o o d s a n d s e r v ic e s 1

Im p o rts o f g o o d s a n d s e r v ic e s

• c h a n g e in fo r e ig n b a l a n c e

S ta tis tic a l d i s c r e p a n c y

G D P a t m a r k e t p ric e s

G D P im p lic it p ric e d e f la to r

1987

c u rre n t prices billion A $

1988 1989 1990 1991 1992

1 6 6 .2 5 0 .2 6 6 .9 2 8 3 .3

0 .0 *

2 8 3 .3

4 6 .1 4 9 .6

- 3 . 5 * 2 .5

2 8 2 .3

3 .5 3.1 8 .2 4 .5

0 .8

5 .3

2 .9 1 5 .5 - 2 . 1 0 .4

3 .5

9.1

5 .0 2 .3

1 0 .0 5 .7

1 . 0 ­

6 .7

2 .7

2 0 .5

- 3 . 4 1.3

4 .6 7 .8

2 .9

4 .0 - 6 . 4 0 .8 - 1 . 4 - 0 . 6

1 2 .2 - 3 . 7 2 .9

- 0 . 8

1.5 3 .8

0 .3 2 .6 - 5 . 2 - 0 . 5

0

- 0 . 5

7 .9 - 0 . 9 1.7 - 0 . 9

0 .2 3 .3

1.6 1.2 2 .8 1.8

0

1.8

4 .2 4 .3

0

0

1.8 3 .7

M e m o r a n d u m i t e m s '

C o n s u m e r p ric e s * - 7.1 6 .7 6.1 4 .2 4 .0

In d u s tria l p r o d u c tio n ' - 5.7 6 .0 2 .4 1.3 2 .6

U n e m p lo y m e n t r a t e - 7.1 6.1 6 .9 9 .9 9 .9

H o u s e h o ld s a v in g r a t i o ' - 6 .5 6 .9 6 .0 4 .5 4 .2

G e n e ra l g o v e r n m e n t f in a n c ia l b a l a n c e * - l . l 1.6 1.8 0 .3 - 0.1

C u r r e n t b a l a n c e (S b illio n ) - - 1 0 .1 - 1 7 . 3 - 1 4 . 3 - 1 2 . 3 - 1 3 . 6

• As a percentage of GDP in the previous period, a) Actual amount. bj National accounts implicit private consumption deflator. c) As a percentage of disposable income. d) As a percentage of GDP.

the Wage Accord which traded o(T tax cuts for wage moderation in 1991, will also reduce tax revenue, as will a number of recent structural initiatives. The March 1991 Economic Statem ent reaffirmed the

government’s commitment to lowering general tariff rates unilaterally to 5 per cent by 1996. Additional exemptions for wholesale tax on business inputs were also announced to reduce the cascading of tax and to strengthen Australia’s competitive position.

The recession has been sharper than that of 1982-83, but is projected to be shorter. Domestic demand fell further in the first quarter of 1991, but may start recovering progressively in the second half of

this year, reflecting a rebound in consumer confidence, falling inflation, lower interest rates, an end to destock­ ing and to falling auto sales, as well as rising housing

starts. The recovery in demand is, however, project! to be restrained, remaining below the growth of pole tial output - largely because business investment unlikely to be a significant source of strength un· better balance-sheet positions are established. Uner ployment is projected to rise into 1992, peaking more than 10 per cent of the labour force. Inflation ( measured by the growth in the GDP deflator) is pr jected to remain closely in line with that of maj

OECD countries in the coming 18 months. With wor commodity prices weak and import penetration risin the current account deficit migju remain at some 4

4*/i per cent of GDP over the next year and a half. Tf would imply a further modest rise in the ratio of fc eign debt to GDP.