The Australian economy performed strongly in 1998, despite difficult trading conditions in Asia and uncertainty in the world economy. Strong economic growth was accompanied by solid gains in employment and low inflation.

Real GDP increased by 5.1% in 1998 following 3.6% growth in 1997. Growth was consistently strong, with Australia recording five consecutive quarters of growth of 1.0% or higher up to the December quarter 1998.

Business investment rose by 7.1% in 1998, the sixth year of strong growth. However, business investment slowed through the year, and fell by 2.4% over the year to the December quarter. Falls in investment were driven predominantly by slower investment in the resources sector, which has been hit by the weak world trading environment. However, the recovery of business confidence to pre-Asian crisis levels, coupled with low nominal and real interest rates and sound corporate profits provides a supportive investment environment.

Dwelling investment rose by 9.6% in 1998 after 14.7% growth in 1997, reflecting low interest rates and high levels of housing affordability.

Private consumption rose by 4.3% in 1998, following 3.4% growth in 1997. The strength in consumption reflected low interest rates, solid employment growth and rising household wealth.

Underlying public final demand rose by 3.3% in 1998 after rising by 2.3% in 1997. This outcome reflected strong increases in public consumption in 1998, which rose by 5.5%.

Australia achieved an exceptionally good inflation performance in 1998, with the consumer price index (CPI) rising by 1.6% through the year to the December quarter 1998. Continuing low inflation despite a significant decline in the Australian dollar reflected continuing competitive pressures in the Australian economy and in the world.

The unemployment rate fell significantly towards the end of 1998 to reach 7.6% in December 1998. Employment grew by 2.1% through the year to December 1998.

Wages, as measured by average weekly ordinary-time earnings for full-time adults, rose by 4.2% through the year to the December quarter 1998. Average weekly earnings (all employees), however, rose by 1.9% through the year to the December quarter 1998.

The current account deficit rose to 5.0% of GDP in 1998 from 3.1% in 1997. This reflected a deterioration in the balance of trade, coming from weak exports and poorer terms of trade. The onset of economic difficulties in several East Asian economies in 1997 meant that export demand remained subdued while import demand was solid due to ongoing strong domestic demand. A feature of Australia’s export performance in the first half of the economic downturn in East Asia was a significant diversion of exports, particularly commodities, away from the troubled East Asian economies and toward faster growing economies elsewhere.

Unlike previous episodes in Australia when the current account deficit has increased significantly as a percentage of GDP, growth in the net income deficit has been subdued.

Net external debt was 41.0% of GDP (or US$145.4 billion) at the end of December 1998, below the peak of 41.9% at the end of December 1992. The public sector accounts for approximately 21% of this total, while approximately 79% of Australia’s net foreign debt is owed by business/private sector borrowers. The build-up in foreign debt is a result of ongoing current account deficits reflecting a structural saving-investment imbalance. This is being addressed through fiscal policy focussing on reducing the public sector’s call on national saving while other policies have been implemented to improve the efficiency and effectiveness of investment.

Gross external debt was 61.3% of GDP (or US$208.1 billion) at the end of September 1998.

Foreign direct investment in Australia was 28.3% of GDP (or US$96.2 billion) at the end of September 1998.

Since 1983, Australia has had a floating exchange rate. The Reserve Bank may undertake foreign exchange market operations when the market threatens to become excessively volatile or when the exchange rate has clearly ‘overshot’ a level consistent with underlying economic fundamentals. However, these operations are invariably aimed at stabilizing market conditions and are not undertaken in accordance with a specific exchange rate target.

The Australian dollar depreciated (in nominal terms) during 1998 by 6% against the US dollar and by 14% against the Japanese yen. On a trade-weighted basis, the Australian dollar depreciated by around 11% in 1998, with falls against most major currencies. The Australian dollar depreciating against some of the East Asian currencies during 1998, as these currencies regained some ground.

Total General Government net lending returned to surplus in the 1997-98 financial year (data is not available on a calendar year basis). This improvement was mainly due to the elimination of the Commonwealth Government’s fiscal deficit. Further improvement is expected in 1999-2000, with the Commonwealth Government expected to record a fiscal surplus of 0.8% of GDP.

The Reserve Bank of Australia has the primary responsibility for the conduct of monetary policy. The formal objectives of monetary policy require the Reserve Bank Board to conduct monetary policy in a way that will best contribute to price (currency) stability, the maintenance of full employment, and the economic prosperity and welfare of the people of Australia. Price stability is regarded as a precondition for achieving the last two objectives and in pursuit of this goal the Reserve Bank has a commitment to hold inflation to between 2% and 3%, on average, over the course of the economic cycle.

In pursuit of this objective, the Reserve Bank targets a publicly announced overnight cash rate target (the intermediate objective) which is determined by the Reserve Bank Board. The Reserve Bank Board does not target intermediate financial aggregates. Between mid 1996 and December 1998, six reductions in the target cash rate were announced, leading to a 2.75% fall in the overnight cash rate to a target of around 4.75%.

Falling nominal overnight cash rates contributed to real short-term (overnight) interest rates (as deflated using the underlying rate of inflation) falling by around 30 basis points during 1998. The fall in real short-term interest rates in 1998 was similar (in magnitude) to that recorded in 1997, when a 100 basis point reduction in the overnight cash rate underpinned reductions in real short-term interest rates. Lower nominal long-term interest rates have underpinned reductions in real long-term interest rates of around 100 basis points in 1998 and 70 basis points in 1997.

The outlook for the Australian economy is for continued solid growth and low inflation. Following very strong growth in 1997-98 and 1998-99, growth will slow somewhat to around 3% in 1999-2000 in light of the weak world economy. Solid domestic economic growth is expected to be underpinned by private consumption resulting from rising household wealth and continuing solid employment growth.

After six years of strong growth, growth in business investment is expected to be flat in 1999-2000 reflecting the maturity of the investment cycle and below-trend world growth. Nevertheless, business investment is expected to be around its long-term average share of GDP.

The outlook is for the current account deficit to decline moderately in 1999-2000 due to a gradual pick-up in growth in Australia’s export markets and a slight increase in the terms of trade.

Inflation is expected to stay subdued. The consumer price index (CPI) is expected to increase by 2% in 1999-2000.

The Australian Government is implementing a program to reform the taxation system. The program addresses indirect taxes, personal income taxation, the welfare system and business taxation, and will involve changes to the financial relations between the Federal Government and the States and Territories. The new tax system will begin in July 2000, subject to the necessary legislative changes.

The Australian Government is implementing a program to reform the financial system. Stage I of the reform program, which included the rationalization of the regulatory structure, initiatives to balance prudential and competition objectives, and moves to promote efficiency, competition and confidence in the payments system, has been implemented. Stage II is now in the process of being implemented, the major objective of which is to facilitate the transfer of State and Territory regulated financial institutions to the Commonwealth’s regulatory regime.

The Corporate Law Economic Reform Program is modernizing Australia’s Corporations Law and giving it an economic focus by introducing world’s best practice in business regulation. The program is addressing reform of regulatory requirements regarding fundraising, takeovers, directors’ duties, corporate governance, financial reporting and conduct and disclosure practices in financial markets. The focus is on providing the regulation necessary for well-functioning markets, without compromising efficiency.

Australia has a sophisticated and cohesive competition policy which has undergone significant development in recent years. The policy is based on the recommendations in the 1993 Hilmer Report, which followed a comprehensive review of competition policy in Australia. The national competition policy consists of six elements.

1. Universal application of the competitive conduct rules contained in the Trade Practices Act 1974 to all sectors of the Australian economy including government business activities and those of the unincorporated sector (e.g., the professions).
2. The review of legislation which restricts competition to ensure that such restrictions are necessary to achieve the objects of the legislation and that there is a net benefit to the community as a whole as a result of the restriction.
3. Structural reform of public monopolies where a government has decided to introduce competition or undertake privatisation.
4. Enabling access to services provided by means of significant infrastructure facilities.
5. Price oversight of government businesses with a high degree of market power.
6. Competitive neutrality principles which state that government businesses should not enjoy any net competitive advantage simply as a result of their public sector ownership.

Notes: (1) Calculated are as financial year basis so that, for example, 1994 figures equal financial year 1994-1994.

Table 2. Forecasting Summary (% change from previous year)

Note: The IMF forecast is from the World Economic Outlook (IMF, April 1999). The OECD forecast is from the OECD Economic Outlook (OECD, June 1999).