The OECD Economic Outlook released overnight confirms that the fundamentals and outlook for the Australian economy remain solid, despite a major deterioration in Europe and a further slowing in the global economy in recent months.
The OECD states that Europe's escalating crisis has resulted in a weaker growth outlook for OECD economies in the near term, and notes the euro area appears to be in a mild recession.
Against this backdrop, the growth forecast for OECD economies has been dramatically cut since May, revised down to 1.8 per cent in 2011 (from 2.3 per cent) and 1.6 per cent in 2012 (from 2.8 per cent).
In addition, the OECD warns of serious downside risks to this outlook, particularly the possibility of a sovereign default in the euro area causing contagion to spread to other markets. According to the OECD, "without preventive action, events could strengthen such pressures and plunge the euro area into a deep recession with large negative effects for the global economy."
Despite the turbulence in the global economy, the OECD forecasts the Australian economy is still expected to grow substantially faster than its peers, with growth of 4.0 per cent in 2012 and 3.2 per cent in 2013.
The OECD expects Australia's unemployment rate to tick up slightly to 5.3 per cent in 2012, although this is much lower than the 8 per cent unemployment rate expected for the OECD area as a whole, and reflects the strong economic management that saw Australia avoid recession during the global financial crisis and continue to create jobs through the recovery.
The OECD states that Australia's "unemployment is expected to stay low and underlying inflation contained as the remaining slack in the economy gradually disappears."
The OECD firmly endorses Australia's budget strategy, noting that "stringent spending control, consistent with the Government's plans, is still necessary to offset the revenue declines induced by the financial crisis and natural disasters."
If global conditions deteriorate significantly, the OECD notes that Australia has room to move on monetary policy as well as the ability to provide fiscal support should it be necessary, due to our very low level of public debt.
In these uncertain times for the global economy, the Government recognises the importance of striking the right balance between budget discipline and continuing to support job creation and growth. Just as it would be wrong to abandon our determination to return to surplus in 2012-13, it would also be counterproductive to take an axe to the budget.
Strong and stable economic management, and our record of fiscal discipline, remain very important for Australian families across the country, helping underpin confidence and supporting Australian jobs.