The Macroeconomic Outlook - 3 The Macroeconomic Outlook C W...

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3 The Macroeconomic Outlook C. W. Murphy Access Economics and Department of Statistics Australian National University Abstract A slow recovery, commencing in the De- cember quarter of 7997, is expected from the current recession. Overall, gross domestic product (GDP) may in- crease by 2.8 per cent in the year to the June quarter of 7992, and continue to in- crease at a similar rate thereafter. This subdued recovery is likely to see the unemployment rate at over 70 per cent to the end of 7992, before moving down slowly to around 8.5 per cent by the mid- 7990s. Consumer price index (CPI) inflation may fall sharply from a peak of 8.0 per cent in 7989-90 to a trough of under 3 per cent in 7997-92, due to the reces- sion and movements in oil prices. With a slow recovery, inflation may then in- crease to 5 per cent per annum in the medium term. The current account deficit has fallen from 6.0 per cent of GDP in 7989-90 to 4.7 per cent in 1990-9 7, despite a fall in the terms of trade of 5 per cent. How- ever, this has been due to the cyclical downturn. With a slow recovery in de- mand, and rising real labour costs ham- pering expansion in export and import- competing industries, the current ac- count deficit may once again reach 6 per cent of GDP by the mid-7990s, implying steady increases in the foreign debt-to- GDP ratio. This forecast assumes monetary pol- icy targets an inflation rate of 5 per cent per annum. Any further easings in mon- etary policy may undermine the credibil- ity of the inflation objective with the result that the trade weighted index (Wl) ex- change rate may drop sharply from 59. 1. Introduction The most recent data show that econ- omic activity may now be slowly rising, unemployment may be close to a peak, and inflation and the current account deficit have fallen sharply. Two major questions are raised by the emerging re- covery. What will be the pace and dura- bility of the recovery? To what extent will the recovery cause inflation and the cur- rent account deficit to rebound from the low levels that were experienced during 1991? This article addresses both of these questions. It also considers the debate concerning the appropriate stance of monetary policy at this stage of the economic cycle. Should the cash rate be cut further? A four-year quarterly forecast ob- tained using the ‘Access Economics Murphy’ model of Australia is presented. Details of an earlier version of the model can be found in Murphy (1 988a, 1988b). This article was completed after the release by the Australian Bureau of Stat- istics of the September quarter Con- sumer Price Index and October Labour Force, but before the release of the Sep- tember quarter National Accounts, which is scheduled for 5 December. The precise forecast horizon is the Septem- ber quarter of 1991 to the June quarter of 1995. The assumptions underlying the fore-
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This note was uploaded on 04/28/2010 for the course ECON ECON2001 taught by Professor Tonyblake during the Spring '10 term at University of St Andrews.

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The Macroeconomic Outlook - 3 The Macroeconomic Outlook C W...

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