ECONOMIC OUTLOOK INFORMATION PAPER. National Electricity Forecasting

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1 ECONOMIC OUTLOOK INFORMATION PAPER National Electricity Forecasting 2012

2 ECONOMIC OUTLOOK INFORMATION PAPER Published by AEMO Australian Energy Market Operator ABN Copyright 2012 AEMO ii AEMO 2012

3 Real GDP/GSP (cummulative annual % growth) EXECUTIVE SUMMARY In 2012, AEMO commissioned the National Institute of Economic and Industry Research (NIEIR) to undertake a detailed analysis of Australia s economic growth and electricity prices based on economic scenarios defined by AEMO. Key observations Key observations regarding economic growth: Growth in Queensland is expected to remain higher than the other regions due to a positive outlook for the mining sector, increased commodity exports, and significant investment in liquefied natural gas (LNG). Growth in the southern regions of the NEM, including Victoria, South Australia, New South Wales, the Australian Capital Territory and Tasmania, with strong links to manufacturing and agriculture, are expected to be constrained by resource sector growth and a high Australian dollar. Expected forecast growth (on average in real terms) in national GDP of 2.82% in the short term ( to ); 3.30% in the medium term ( to ); and 2.38% in the long term ( to ) under a medium growth scenario. See Figure 1 below. Figure 1 Gross domestic product (GDP) and gross state product (GSP) forecasts, medium growth scenario Year QLD NSW & ACT SA VIC TAS AUS AEMO 2012 Executive summary iii

4 Electricity prices (cumulative annual % growth) ECONOMIC OUTLOOK INFORMATION PAPER Key observations regarding electricity prices: Average electricity prices, covering both the residential and business sectors, are forecast to increase by approximately 1% per year (on average in real terms) in the medium term in all five NEM regions under a medium economic growth scenario. In the short term, electricity prices are forecast to increase by approximately 5% per year in every region (on average in real terms) as a result of network infrastructure costs, clean energy policies, and falling demand. Victorian electricity price forecasts are expected to fall in following the final consumer payment associated with the smart-meter roll-out in Percentage growth in Tasmanian retail electricity prices is higher as prices have been historically lower than other NEM regions. See Figure 2 below. Figure 2 Electricity price forecasts (real), medium growth scenario Year QLD NSW & ACT SA VIC TAS Economic factors affecting the changes in electricity demand Rising electricity prices and low economic growth can significantly affect electricity demand. In forecasting demand: Electricity prices are key inputs in determining how consumers are modifying their behaviour to reduce costs associated with electricity consumption. Economic growth, represented by gross domestic product (GDP) and gross state product (GSP), provides insights into possible future electricity demand growth. Economic forecasts (used as inputs into the 2011 Electricity Statement of Opportunities (ESOO) annual energy and maximum demand forecasts) predicted significantly higher-than-actual growth for and As a result, in 2012 AEMO s revised annual energy and maximum demand forecasts are likely to decrease across the National Electricity Market (NEM). iv Executive summary AEMO 2012

5 Next steps AEMO will publish annual energy and maximum demand electricity forecasts for each NEM region by 30 June 2012, with the aim of making the overall process more transparent and of even more value to stakeholders. AEMO will continue to engage and work with stakeholders to improve future demand forecasts through increased discussion regarding inputs and assumptions to ensure better access to representative data. AEMO 2012 Executive summary v

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7 CONTENTS EXECUTIVE SUMMARY III CHAPTER 1 - INTRODUCTION National Electricity Forecasting Impact on demand forecasting Modelling electricity demand Scope of paper Economic service providers Economic variables Economic scenarios Mapping economic scenarios Content of paper 9 CHAPTER 2 - AUSTRALIAN ECONOMIC OUTLOOK Economic growth (GDP) Comparison of GDP forecasts Comparison with previous forecasts Exchange rate (AUD/USD) 15 CHAPTER 3 - REGIONAL ECONOMIC OUTLOOK New South Wales (including the Australian Capital Territory) Economic growth (GSP) Electricity prices Queensland Economic growth (GSP) Electricity prices South Australia Economic growth (GSP) Electricity prices Tasmania Economic growth (GSP) Electricity prices Victoria Economic growth (GSP) Electricity prices 30 APPENDIX A - DRIVERS OF ECONOMIC SCENARIOS A1 A1 Global economic outlook and productivity assumptions A1 A1.1 Australian and global economic growth A1 A1.2 Productivity growth A1 A1.3 Commodity prices A1 A2 Carbon price assumptions and trajectories A2 AEMO 2012 Contents vii

8 ECONOMIC OUTLOOK INFORMATION PAPER APPENDIX B - GLOBAL ECONOMIC OUTLOOK B1 B1 Asia B1 B2 Europe B1 B3 United States of America B2 B4 Oil prices and global inflation B2 DISCLAIMER C1 TABLES Table 1-1 Likely impact of key individual economic variables on electricity demand 3 Table 1-2 Economic scenario assumptions 6 Table A-1 Carbon price trajectories ($/t CO2-e) A3 FIGURES Figure 1-1 AEMO s National Electricity Forecasting 2 Figure 1-2 Mapping scenarios for National Electricity Forecasting 8 Figure 2-1 GDP forecasts for Australia 12 Figure 2-2 Comparison of GDP forecasts for Australia 13 Figure 2-3 Comparison of current and previous GDP forecasts for Australia 14 Figure 2-4 Exchange rate forecasts 15 Figure 3-1 GSP forecasts for New South Wales (including ACT) 17 Figure 3-2 Comparison of current and previous GSP forecasts for New South Wales (including the ACT) 18 Figure 3-3 Electricity prices for the medium scenario for New South Wales (including ACT) 19 Figure 3-4 GSP forecasts for Queensland 20 Figure 3-5 Comparison of current and previous GSP forecasts for Queensland 21 Figure 3-6 Electricity prices for the medium scenario for Queensland 22 Figure 3-7 GSP forecasts for South Australia 23 Figure 3-8 Comparison of current and previous GSP forecasts for South Australia 24 Figure 3-9 Electricity prices for the medium scenario for South Australia 25 Figure 3-10 GSP forecasts for Tasmania (% real growth) 26 Figure 3-11 Comparison of current and previous GSP forecasts for Tasmania 27 Figure 3-12 Electricity prices for the medium scenario for Tasmania 27 Figure 3-13 GSP forecasts for Victoria 28 Figure 3-14 Comparison of current and previous GSP forecasts for Victoria 29 Figure 3-15 Electricity prices for the medium scenario for Victoria 30 viii Contents AEMO 2012

9 CHAPTER 1 - INTRODUCTION 1.2 National Electricity Forecasting AEMO has changed the way it develops and publishes demand forecasts for the electricity industry. AEMO is for the first time developing an independent set of electricity demand forecasts for each of the five NEM regions. AEMO is ideally positioned to undertake this project and to lead collaboration with industry to ensure that representative and reliable forecasts are produced on a consistent basis across all NEM regions. These forecasts are used for both operational purposes, including the calculation of marginal loss factors, and as a key input into AEMO s national transmission planning role. It is therefore necessary for AEMO to know how these forecasts are developed, and to ensure forecasting processes and assumptions are consistent across regions, to make certain they are suitable for purpose. This contrasts with in the past, AEMO published demand forecasts in a series of AEMO publications, namely the Electricity Statement of Opportunities (ESOO), the Victorian Annual Planning Report (VAPR), and the South Australian Supply and Demand Outlook (SASDO). AEMO developed demand forecasts for South Australia and Victoria, whilst the regional transmission network service providers (TNSPs) developed demand forecasts for the remaining three regions in the National Electricity Market (NEM), namely Queensland, New South Wales (including the Australian Capital Territory), and Tasmania. Through this new approach to increase the transparency of the forecasting process and to stimulate discussion with members of the electricity industry, AEMO intends to publish five information papers and reports: Economic Outlook Information Paper AEMO s assessment of the work undertaken by the National Institute of Economic and Industry Research (NIEIR). Rooftop PV Information Paper Quantifying the impact of rooftop photovoltaic (PV) on the electricity market NEM Demand Review Information Paper A review of NEM demand. Forecasting Methodology Information Paper A description of the AEMO modelling process used to develop demand forecasts National Electricity Forecasting Report (NEFR) The main forecasting report presenting new electricity demand forecasts for the five NEM regions. Figure 1-1 shows how all the work behind the forecasts comes together and how we publish it this year. As this is the first time that AEMO has developed these electricity forecasts across the NEM, there is still work to be done to improve the way AEMO forecasts. Over the next couple of years, AEMO will continue to improve the data, modelling, and interpretation that underpin these forecasts, and engage with industry on an ongoing basis to ensure an open and transparent process. AEMO 2012 Introduction 1

10 ECONOMIC OUTLOOK INFORMATION PAPER Figure 1-1 AEMO s National Electricity Forecasting Inputs Model and forecast development Reports Historical rooftop PV Data Historical Economic Data 2012 NTNDP Scenarios Historical Demand Data Historical Weather Data Policy Assumptions New Technology Assumptions Demand Side Participation Assumptions Major industrial load information Analysis Forecast Analysis Model Model Forecast Forecast Rooftop PV Economic Outlook Electricity Forecasting Methodology National Electricity Forecasting Report (NEFR) May 2012 release June 2012 release Demand Data Weather Data Analysis NEM Demand Review 1.3 Impact on demand forecasting Historically, the performance of the global economy has had a significant impact on Australia s economic performance, and therefore on the Australian energy market. This information paper evaluates economic forecasts at the global, national, and state/territory level, and the influential role these forecasts have on the development of energy demand forecasts. In the past, Australia s manufacturing and agricultural sectors have made a large impact on economic growth. In recent years, the economy has been going through a structural change as mining becomes the most dominant industry sector. This structural change, which is changing the nature of the Australian economy, is also expected to cause a change in electricity demand, particularly since the mining sector is energy intensive. In June 2012, AEMO is for the first time releasing a consistent set of electricity demand forecasts for the NEM and each of the five regions. The modelling process includes the strong influence economic forecasts have on forecasting demand. Table 1-1 explains the likely individual impacts of a range of economic variables on demand forecasts, assuming no change in any of the other variables. Although the quantified one-off impacts are relatively small, sustained higher or lower growth in any of these variables can produce significant changes in the future path of electricity demand. A selection of these variables will be discussed further in the remaining chapters of this report. 2 Introduction AEMO 2012

11 Scenarios incorporating relatively higher economic and population growth are associated with relatively higher electricity demand, while relatively higher electricity prices (in real terms) contribute to relatively lower electricity demand. Table 1-1 Likely impact of key individual economic variables on electricity demand Macroeconomic indicators Economic growth (gross domestic product or gross state product) Impact on demand As economic growth increases by 1%, long-run electricity demand increases by less than 1%. Population As population increases by 1%, long-run electricity demand increases by less than 1%. Electricity price Gas and other household fuels price Interest rates Consumer price index (CPI) Other indicators As the average retail price (after adjusting for inflation) increases by 1%, long-run electricity demand decreases by less than 0.5%. For some regions, an increase in the price of substitute fuels will increase long-run electricity demand. In general, an increase in the standard variable mortgage interest rate (in real terms) will have a small negative impact on electricity demand. General price increases without changes in nominal energy prices has the effect of stimulating electricity demand by virtue of lower real prices. However, higher CPI growth is likely to be accompanied by proportionally higher energy price growth, thus having no impact on electricity demand. Exchange rate and commodity prices may have significant impacts on major industrial and mining loads, but these are not modelled by AEMO directly in this manner Modelling electricity demand Economic forecasts are a key input into forecasting electricity demand. AEMO s demand forecasts depend in the long-term on future population, income and energy price scenarios, as well as short-term seasonal variations in the weather. For each of the five NEM regions, the modelling process involves: Developing models based on historical relationships between electricity usage and demographic, economic and weather input variables. Using models to predict the future path of electricity usage based on input variables defined according to various scenarios. Adjusting the projected electricity usage trends to account for expected changes in large spot loads, energy efficiency measures, rooftop PV generation, electric vehicle charging, network losses and generator auxiliary loads to produce the published annual energy forecasts and understand how much of this demand will be served by the NEM. Determining the frequency distribution of maximum demand by using the annual energy forecasts as a key input into the half-hourly models that represent time and weather-based variation. A detailed explanation of this modelling process will be provided alongside the forecasting report due for release in June AEMO 2012 Introduction 3

12 ECONOMIC OUTLOOK INFORMATION PAPER 1.4 Scope of paper Economic service providers A variety of different economic viewpoints are published that analyse how global and Australian economies are expected to perform. A key set of economic forecasts are produced by the Australian Government Treasury, with a medium-term economic and fiscal outlook 1 produced once a year as part of the budget process, as well as producing forecasts for key macroeconomic and fiscal variables. As part of developing demand forecasts, AEMO requires long-term forecasts for a range of economic variables that influence demand, including at the sectoral level. Given the level of detail required, AEMO is unable to use Treasury forecasts, and as a result AEMO has tendered for the provision of economic services. These services have previously been provided by KPMG. In 2011, AEMO re-tendered for the next three-year period (2012 to 2014). Since forecasting demand is influenced by changes in economic forecasts, there is an expectation that by changing the service provider there will be a change in the demand forecasts AEMO is currently developing. This has been highlighted in Chapters 2 and 3, where gross domestic product (GDP) and gross state product (GSP) forecasts from KPMG and one of the two new service providers have been compared. Given the wide range of views about economic growth in the public domain, AEMO wanted to build a second opinion into our processes. For the period 2012 to 2014, AEMO has commissioned two economic service providers, the National Institute of Economic and Industry Research (NIEIR) and PricewaterhouseCoopers (PwC), to achieve a consensus economic viewpoint. Both providers have developed a set of independent macroeconomic, demographic and energy market forecasts for the outlook period from to The scope of work includes delivery of a series of forecast variables: Forecast variables, including national, state and industry sector economic forecasts, and demographic and energy (electricity and gas) price forecasts. Forecast variables classified into three groups: At both the national and state/territory levels. Only at the national level. Energy market variables only at the state/territory level. Preparation of forecast variables for five scenarios defined by AEMO. In 2012, AEMO has chosen to adopt NIEIR s economic forecasts, which are presented in this information paper. In 2013 and 2014, AEMO anticipates that the two sets of independent economic forecasts will be used as inputs into modelling a range of electricity demand forecasts and compared. 1 Australian Government Treasury, Mid-year Economic and Fiscal Outlook, 29 November Introduction AEMO 2012

13 1.4.2 Economic variables AEMO uses the outlook of a range of economic variables as forecasting inputs: Demographic, involving population, number of households, net immigration. Labour market, involving employment, participation rates, unemployment and wages. National Accounts, involving GDP, GSP, household consumption, dwelling investment and non-dwelling construction investment, government consumption, domestic and state final demand (the measure of economic demand for products), and business investment. Aggregate price levels, involving GDP deflator, CPI and PPI. Sectoral output, involving gross value added (GVA) for a wide range of sectors including construction, mining, gas and electricity and metals. Trade, involving imports, exports, terms of trade and the current account balance. Financial data, involving popular interest rates and exchange rates. Energy market, involving residential, business and total electricity and gas prices. Forecast average annual growth rates in residential, business (non-residential) and total (residential and business) electricity prices are discussed at the state level in Chapter 3. Electricity prices are based on average retail prices. The price drivers in each of the five NEM regions include similar considerations: Network costs due to existing revenue determinations and the longer-term costs of changing generation sources and locations (including renewable), and demand (particularly mining and liquefied natural gas (LNG). Ongoing costs of green programs including energy efficiency schemes and the national Renewable Energy Target (RET) scheme. Fuel costs including the impact of carbon pricing. AEMO 2012 Introduction 5

14 ECONOMIC OUTLOOK INFORMATION PAPER Economic scenarios Forecasts for the economic variables are calculated for a range of economic scenarios defined by AEMO. Table 1-2 lists the different assumptions about productivity growth, commodity prices, carbon prices, and growth of the working age population that the economic scenarios reflect. Table 1-2 Economic scenario assumptions Scenario assumptions MCO5 HCO25 HCO5 LCO0 LCO5 Global economy outlook and productivity assumptions Demographic assumptions Carbon price assumptions Fuel prices National and global economic growth Productivity growth Commodity prices Population growth Immigration rate Fertility rate The Treasury - Strong Growth, Low Pollution, Modelling a Carbon Price report CO2-e emissions reduction target by 2020 CO2-e emissions reduction target by 2050 International coal prices, East Coast gas prices LNG East Coast Production Medium High High Low Low Medium High High Low Low The Treasury SGLP scenario The Treasury SGLP High price scenario The Treasury SGLP scenario The Treasury SGLP core scenario for the first three years and 0 (zero) $/t CO2-e onwards 5% 25% 5% 5% a 5% 80% 80% 80% 80% 80% Stable Increasing Stable Falling Stable Medium High High Low Low The Treasury SGLP scenario a. Even though the carbon price for this scenario is 0 (zero) $/t CO2-e from onwards, it is assumed that a low economic growth scenario will cause a reduction of CO2-e emissions of 5% by This information paper only presents the main results for three economic scenarios: The medium (base) scenario (MCO5), representing medium economic and population growth. This is a base case scenario contingent on expected or most likely economic and population growth rates. The scenario assumes carbon emission targets of 5% by The high scenario (HCO5), representing high economic and population growth. The Australian Clean Energy Legislative Package remains in place, and Australia continues on its trajectory to achieve 5% cuts on 2000 levels by 2020 with a carbon price equivalent to Treasury s core carbon price trajectory. Also, Australia s population continues to grow strongly to support economic growth. The low scenario (LCO5), representing low economic and population growth. Low international economic growth leads to low rural and non-rural commodity prices impacting on the Australian economy. World credit risk premiums are high with a low level of capital liquidity. This is constraining investment, particularly in new technologies, including low carbon and renewable energy technologies. Research and development in new low emission generation technologies is slow. 6 Introduction AEMO 2012

15 There are also two other economic scenarios: The high scenario (HCO25), representing high economic and population growth. This aims to achieve a global CO2-e concentration not exceeding 450 ppm (parts-per-million) by 2050, prices for both rural and non-rural commodities are high, and Australia maintains a high level of immigration, which all supports growth in the Australian economy. The low scenario (LCO0), representing low economic and population growth. This is defined by low commodity prices for both rural and non-rural commodities, and minimal response to climate change where the carbon price drops to zero after the first three years of a fixed price. For more information about the final NIEIR report and associated spreadsheets (which contain data for all five scenarios), see the AEMO website Mapping economic scenarios Six scenarios have been developed for the electricity demand forecasts as part of National Electricity Forecasting. 3 These are equivalent to the scenarios that will also be used in the 2012 National Transmission Network Development Plan (NTNDP) and 2012 Gas Statement of Opportunities (GSOO). Figure 1-2 shows the economic forecasts calculated for each of the economic scenarios, which are inputs into the six scenarios that underpin the development work for the electricity demand forecasts. These demand forecasts will be released in June AEMO, available Viewed May AEMO 2012 Scenarios Description, available Viewed May AEMO 2012 Introduction 7

16 ECONOMIC OUTLOOK INFORMATION PAPER Figure 1-2 Mapping scenarios for National Electricity Forecasting Economic Scenarios 2012 NTNDP scenarios HCO25 scenario Scenario 1 Fast rate of change HCO5 scenario High Scenario 2 Fast world recovery MCO5 scenario Medium Scenario 3 Planning Scenario 4 - Decentralised world LCO0 scenario Scenario 5 Slow rate of change LCO5 scenario LCO5 scenario Low Scenario 6 Slow growth 8 Introduction AEMO 2012

17 1.5 Content of paper The Economic Outlook Information Paper presents a high-level summary of the work AEMO commissioned NIEIR to undertake, and highlights predicted changes in: Economic growth, represented by Gross Domestic Product and Gross State Product, providing an insight into possible future electricity demand growth, and Electricity price, a key input to determining how consumers will modify their behaviour to reduce costs associated with electricity consumption. Results are mainly discussed for the medium scenario, which is the base case scenario contingent on expected or most likely to occur. Chapter 1, Introduction, provides background information and summarises the impact of economic forecasts on demand. Chapter 2, Australian economic outlook, presents a brief discussion of GDP, the Australian Dollar/United States Dollar (AUD/USD) exchange rate, compares a range of different GDP forecasts, and also compares changes in the GDP forecasts developed by NIEIR with the equivalent forecasts used in the 2011 ESOO. Chapter 3, Regional economic outlook, presents a summary of GSP and electricity prices for each of the five NEM regions, and compares changes in the GSP forecasts developed by NIEIR with the equivalent forecasts used in the 2011 ESOO. Appendix A, Drivers of economic scenarios, outlines the drivers and assumptions used to define the economics scenarios. Appendix B, Global economic outlook, presents a summary of the economic outlook for key international regions, and oil prices and global inflation. AEMO 2012 Introduction 9

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19 CHAPTER 2 - AUSTRALIAN ECONOMIC OUTLOOK This chapter provides a summary of some key macroeconomic variables at the national level, and discusses the key factors affecting changes in these forecasts from to NIEIR has assumed that the main Australian economic policy settings are intended to allow the Australian economy to respond to global demand opportunities. This assumes that over the past 30 to 40 years growth in Australian trade (3.5% per year) has followed global trends. The information in this chapter also considers Western Australia and the Northern Territory. 2.1 Economic growth (GDP) In terms of economic growth (measured by GDP), NIEIR assumes that one of the main factors influencing the performance of the Australian economy is the historical trend of global economic growth over the last 50 years. As a result, NIEIR s forecasts assume that the Australian economy responds to demand opportunities created by the global economy. Australia s propensity to rapidly increase its current account deficit to 6% to 8% of GDP when growth is not based on global demand opportunities means that interest rates have to increase rapidly to attract the capital inflows to finance the current account deficit. This has the effect of reducing growth to a level compatible with demand opportunities created by the global economy. Australia s current high net foreign debt to GDP ratio and net foreign short-term debt to foreign reserves ratio ensure that this constraint/mechanism will not become redundant in the foreseeable future. As a result, the variation in Australian GDP growth under each AEMO scenario is expected to be similar to the growth in global GDP. Figure 2-1 shows historical and forecast GDP growth from to for the low (LC05), medium (MC05) and high (HC05) scenarios (for more information about the scenarios, see Section 0). AEMO 2012 Australian economic outlook 11

20 GDP (annual % growth) ECONOMIC OUTLOOK INFORMATION PAPER Figure 2-1 GDP forecasts for Australia Year Actual MCO5 HCO5 LCO5 The Australian economy grew 1.9% in easing slightly from 2.3% in , which is the third successive year of below average growth following the global financial crisis (GFC) in late In the short-term, expected growth is projected to be 3.0% and 3.3% in and , respectively. The medium scenario (MC05) includes four key assumptions for Australian GDP: As a result of the debt ceiling constraints, the contribution from private consumption expenditure to GDP growth is forecast to revert to pre-mining expansion levels. In the short-term, this contribution is projected to be generally less than two percentage points. The mining expansion between 2012 and 2013 will make a stronger contribution to growth in GDP than private investment in contrast to what occurred historically (between 2006 and 2010). Fiscal consolidation is forecast to make a negative contribution to Australian economic growth during Borrowing over the next two years indicates that much of the positive stimulus and economic growth will continue to be due to expansion in the mining sector. Historically, the manufacturing sector has been a significant contributor to Australian GDP. For the medium scenario, the average annual growth rate for manufacturing output from to is 1.2%. However, for the next 10 years the average annual growth rate is approximately 1% per annum. It is not until the terms of trade fall significantly during the decade commencing in 2020, along with a declining exchange rate, that manufacturing activity expands significantly. The medium scenario assumes a sustained attempt to maintain as much manufacturing capacity as possible via subsidies and direct market support. 12 Australian economic outlook AEMO 2012

21 GDP projections (annual % growth) Comparison of GDP forecasts Figure 2-2 presents the range of publicly available economic forecasts for Australian GDP growth from to (and the difference of opinion in this area). Forecasts were sourced from NIEIR, PwC, KPMG, Treasury, the Reserve Bank of Australia (RBA), the International Monetary Fund (IMF), Deloitte-Access Economics, and Goldman Sachs, all of whom publish regular Australian economic forecasts (usually biannually or annually). Figure 2-2 Comparison of GDP forecasts for Australia Maximum Minimum NIEIR A large number of regional demand forecasting models include GSP and/or GSP split by industry sector as drivers of demand. To improve the transparency of the forecasting process and to ensure the most appropriate economic forecasts are used as part of that process, in the future AEMO will make use of a wider variety of economic inputs to forecast regional demand. This will better present the range of possible outcomes of future electricity demand and highlight the inherent uncertainty in the forecasting process. AEMO 2012 Australian economic outlook 13

22 Real GDP (annual % growth) Real GDP (cumulative % growth) ECONOMIC OUTLOOK INFORMATION PAPER Comparison with previous forecasts Figure 2-3 shows differences in GDP forecasts provided by NIEIR in 2012 and KPMG in The bars compare annual percentage growth in real GDP forecasts. The bars also highlight different starting years, and show that NIEIR has used one extra year of data to develop the forecasts. The lines compare annual cumulative percentage growth in real GDP forecasts (for example, if GDP grows by 3% a year for 10 years, at the end of the 10-year period growth has accumulated to 34%), and show that differences in forecasts exist in the short to medium-term. In 2012, NIEIR s estimated growth rates align with expectations from the RBA. In the short-term, NIEIR s GDP forecasts for the medium scenario (MC05) show an average annual growth rate of 2.8%. The increase in GDP growth between and is driven by the expected mining boom in the northern states of Australia. Figure 2-3 Comparison of current and previous GDP forecasts for Australia Year NIEIR 2012 KPMG 2011 NIEIR 2012 KPMG Australian economic outlook AEMO 2012

23 AUD/USD exchange rate 2.2 Exchange rate (AUD/USD) Commodity markets have driven changes in the Australian Dollar (AUD) against the United States Dollar (USD) exchange rate. Over the last 5 years, Australia s terms of trade have been primarily dominated by commodity exports. Since 2007, the AUD/USD exchange rate has increased due to a recovery in the prices of agricultural products. In 2008, spending in Australia surpassed the outlook for export earnings and the value of the AUD declined. From 2009 onwards, this exchange rate has remained high as a result of major developments in commodity markets and strong ties with importers from Asia, in particular China. The upturn is also related to the ongoing sovereign debt concerns in Europe and the decision of the RBA to cut policy rates at the end of 2011 (0.25% in both November and December). Since 2009, the strength of the AUD has constrained export growth while import growth has increased. For the medium scenario it is expected that the uncertainty around the recovery in the international outlook, relatively high domestic cash interest rates, expected increases in commodity prices, and significant investment in the mining sector will all continue to support the AUD/USD exchange rate. Figure 2-4 displays the AUD/USD exchange rate by scenario. Figure 2-4 Exchange rate forecasts Year Actual MCO5 HCO5 LCO5 AEMO 2012 Australian economic outlook 15

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25 Real GSP (annual % growth) CHAPTER 3 - REGIONAL ECONOMIC OUTLOOK 3.1 New South Wales (including the Australian Capital Territory) New South Wales and the Australian Capital Territory have been combined into one region for forecasting purposes. This convention reflects the fact that in practice they are a single region in the National Electricity Market (NEM). Given the small relative size of the Australian Capital Territory, this section focuses on New South Wales economic trends Economic growth (GSP) Expectations by the RBA for GSP growth in New South Wales and the Australian Capital Territory are more conservative than for the whole of Australia, based predominantly on a predicted slower growth in business investment and trade, and the impact of weaker consumer confidence. Figure 3-1 shows actual and forecast growth rates for GSP for the three main scenarios. Growth in this region is principally driven by service sector growth. However, New South Wales is the most diverse of the regional economies, making it more resilient than the southern regions in the face of changes in mineral and agricultural product prices and the exchange rate. As a result, projected GSP growth is relatively insensitive to different scenarios. New South Wales also receives considerable economic benefit from being the entry point for many overseas migrants. Without considerable infrastructure spending, however, this benefit may diminish in the longer term as the relatively high costs of housing outweigh the available employment and business opportunities. Figure 3-1 GSP forecasts for New South Wales (including ACT) Year Actual MCO5 HCO5 LCO5 AEMO 2012 Regional economic outlook 17

26 Real GSP (annual % growth) Real GSP (cumulative % growth) ECONOMIC OUTLOOK INFORMATION PAPER Comparison with previous forecasts Figure 3-2 shows differences in GSP forecasts provided by NIEIR in 2012 and KPMG in The bars compare annual percentage growth in real GSP forecasts. The bars also highlight different starting years, and show that NIEIR has used one extra year of data to develop the forecasts. The lines compare annual cumulative percentage growth in real GSP forecasts (for example, if GSP grows by 3% a year for 10 years, at the end of the 10-year period growth has accumulated to 34%), and show that differences in forecasts exist from to In the short-term, NIEIR s forecasts show a modest increase in annual GSP growth for New South Wales around 1.6% on average. Figure 3-2 Comparison of current and previous GSP forecasts for New South Wales (including the ACT) Year NIEIR 2012 KPMG 2011 NIEIR 2012 KPMG Electricity prices Figure 3-3 shows forecast average annual growth in residential, business (non-residential) and total electricity prices for the medium scenario. In the short-term, NIEIR s forecasts show a modest increase in (real) annual price growth for New South Wales around 7.5% on average per year. From onwards, growth in electricity prices is less than 2% per year. 18 Regional economic outlook AEMO 2012

27 Electricity prices (annual % growth) Figure 3-3 Electricity prices for the medium scenario for New South Wales (including ACT) Year Residential Business Total (Residencial + Business) 3.2 Queensland In , the Queensland economy grew marginally at an annual average rate of 0.2%, which is the third consecutive year of below average growth since the GFC. There were a series of contributing factors: Natural disasters occurring in September 2010 and February A high Australian dollar affecting manufacturing and service exports. An earthquake and tsunami in Japan (one of Queensland s largest trading partners). High volatility in global financial markets. Sovereign debt concerns in Europe and the United States of America. Increasing oil prices due to political turmoil in North Africa and the Middle-East. Other contributing factors include broader mining sector investment and the strong Australian dollar supporting cheaper imported capital goods for businesses Economic growth (GSP) Queensland s economy has grown at an annual average rate of 4% over the last 10 years. The RBA expects Queensland s GSP to improve, driven by increasing commodity exports and a positive outlook for the mining sector. Business investment is also expected to increase due to significant investment in the liquefied natural gas (LNG) industry, with three major projects under construction. Queensland Treasury expects solid GSP growth in and of 5.0% and 5.25%, respectively, compared to the average pace of growth reported over the last 10 years of 5.3%. AEMO 2012 Regional economic outlook 19

28 Real GSP (annual % growth) ECONOMIC OUTLOOK INFORMATION PAPER Figure 3-4 shows actual and forecast growth rates for GSP for the three main scenarios. GSP recovers steeply in the short term due to a significant increase in mining activity and related construction, which is expected to support employment and household incomes and help to underpin growth in household spending. The GSP for Queensland is expected to grow at an average rate of 3.9% over the next 10 years. NIEIR assumes a mining expansion between 2011 and 2016, driven by investment in LNG projects that are capital and import intensive during the construction phase. A large share of these projects is foreign owned. The mining sector expansion is expected to create a negative crowding-out effect in some NEM regions within a few years. The pace of activity in non-mining industries is expected to be relatively stable, except for the agriculture sector, which is expected to report a contraction in the short term. Figure 3-4 GSP forecasts for Queensland Year Actual MCO5 HCO5 LCO5 Comparison with previous forecasts Figure 3-5 shows differences in GSP forecasts provided by NIEIR in 2012 and KPMG in The bars compare annual percentage growth in real GSP forecasts. The bars also highlight different starting years, and show that NIEIR has used one extra year of data to develop the forecasts. The lines compare annual cumulative percentage growth in real GSP forecasts (for example, if GSP grows by 3% a year for 10 years, at the end of the 10-year period growth has accumulated to 34%), and show that differences in forecasts exist in the short to medium term. NIEIR s GSP forecasts for the medium scenario show a steep recovery from to In the shortterm, the Queensland economy is then expected to grow at a moderate pace slightly above 3% per annum. These forecasts are based on the mining boom and the reactivation of other sectors, such as construction and transport. 20 Regional economic outlook AEMO 2012

29 Real GSP (annual % growth) Real GSP (cumulative % growth) Figure 3-5 Comparison of current and previous GSP forecasts for Queensland Year NIEIR 2012 KPMG 2011 NIEIR 2012 KPMG Electricity prices Figure 3-6 shows forecast average annual growth in residential, business (non-residential) and total electricity prices for the medium scenario. From to , average annual growth is forecast to be larger than the inflation rate. In , NIEIR estimates a large (real) price increase around 10% for total electricity (residential and business) prices. This is forecast to be followed by a downturn in driven by an expected decline in the consumer price index and adjustments in the distribution price regulation when transmission and distribution costs change. From onwards, growth in electricity prices drops from around 2% per year to less than 1% in AEMO 2012 Regional economic outlook 21

30 Electricity prices (annual % growth) ECONOMIC OUTLOOK INFORMATION PAPER Figure 3-6 Electricity prices for the medium scenario for Queensland Year Residential Business Total (Residencial + Business) On 23 April 2012, the Queensland Government announced measures to ease the impact of the carbon price on standard residential electricity tariffs. The Tariff 11 price freeze regulation has been introduced to cater for cost pressures that are forecast to eventuate as a result of the introduction of the Australian Government s carbon tax. This regulation involves freezing the standard electricity tariff paid by the majority of households for 12 months commencing on 1 July The economic forecasts presented in this publication were developed before the Queensland Government s April Tariff 11 price freeze regulation was announced. The National Electricity Forecasting project already assumes that the Australian Government carbon tax policy has a significant impact on electricity prices. 3.3 South Australia South Australia s economy has been affected by the cut in the stimulus package from the Australian Government, in particular in the housing sector. This has also been exacerbated by high vacancy rates in rental accommodation and below average population growth. The South Australian economy is reliant on the manufacturing industry, particularly the automobile and auto parts sector, which have been affected by the reduction in tariff protection and the strong AUD. This has resulted in a slump in business confidence in the sector and a consolidation of costs, mainly in its labour force Economic growth (GSP) Forecast changes in South Australia are more clear-cut than other Australian states, particularly those affected by the mining boom. The South Australian economy is expected to grow at lower levels compared to the rest of the NEM regions. This is mostly explained by the high exchange rate, which will continue to impact trade-exposed sectors including manufacturing, tourism and services, particularly in the short term. The crowding-out effect from the mining boom in Queensland is expected to cause a negative effect in the southern states, including South Australia. 22 Regional economic outlook AEMO 2012

31 Real GSP (annual % growth) In the medium term, projects like Olympic Dam in the north are expected to underpin the economy and sustain levels of employment within the region. Figure 3-7 shows actual and forecast growth rates for GSP for the three main scenarios. Figure 3-7 GSP forecasts for South Australia Year Actual MCO5 HCO5 LCO5 Comparison with previous forecasts Figure 3-8 shows differences in GSP forecasts provided by NIEIR in 2012 and KPMG in The bars compare annual percentage growth in real GSP forecasts. The bars also highlight different starting years, and show that NIEIR has used one extra year of data to develop the forecasts. The lines compare annual cumulative percentage growth in real GSP forecasts (for example, if GSP grows by 3% a year for 10 years, at the end of the 10-year period growth has accumulated to 34%), and show that differences in forecasts exist from to In the short-term, annual GSP growth for NIEIR s medium scenario forecasts are moderate at approximately 1.5%, which is explained by a labour force migration from the southern states to Queensland and Western Australia (the main mining states). AEMO 2012 Regional economic outlook 23

32 Real GSP (annual % growth) Real GSP (cumulative % growth) ECONOMIC OUTLOOK INFORMATION PAPER Figure 3-8 Comparison of current and previous GSP forecasts for South Australia Year NIEIR 2012 KPMG 2011 NIEIR 2012 KPMG Electricity prices Figure 3-9 shows forecast average annual growth in residential, business (non-residential) and total electricity prices for the medium scenario. In the short-term, the moderate growth in South Australian GSP is expected to diminish growth in electricity prices. Electricity prices are expected to grow by 1.5% on average per year from to In , NIEIR forecasts a large (real) price increase of approximately 8% for total electricity prices, followed by a year of negative growth driven by an expected decline in the CPI. 24 Regional economic outlook AEMO 2012

33 Electricity prices (annual % growth) Figure 3-9 Electricity prices for the medium scenario for South Australia Year Residential Business Total (Residencial + Business) 3.4 Tasmania Similar to the South Australian economy, the Tasmanian economy relied heavily on the Australian Government s stimulus package, and particularly the First Home Owner Grant (FHOG) scheme, which kept the housing market buoyant. When this stimulus package was reduced, the impact has been little or no job growth for a year and a drop in job vacancies. This is being further exacerbated by low population growth, particularly among people of working age Economic growth (GSP) The recently released Tasmania Treasury Budget Paper highlights that while Australia's recovery from the global downturn has been largely driven by strong demand for Australian commodities, these same factors have been detrimental to the Tasmanian economy. The increase in commodity prices has increased mineral exploration in the state, but has not led to large increases in the volume or value of traded mining exports to date. The strong AUD is a major challenge for Tasmania's export and import-competing industries. This has coincided with a fall in overseas demand for some Tasmanian commodities, in particular in the manufacturing and forestry sectors. These sectors have been particularly vulnerable, and a number of Tasmanian firms have closed or scaled back operation. For the medium scenario, the Tasmanian economy is expected to increase over the medium-term, explained by the rising commodity price scenario that will increase exports from the state and underpin the economy. Figure 3-10 shows actual and forecast growth rates for GSP for the three main scenarios. AEMO 2012 Regional economic outlook 25

34 Real GSP (annual % growth) ECONOMIC OUTLOOK INFORMATION PAPER Figure 3-10 GSP forecasts for Tasmania (% real growth) Year Actual MCO5 HCO5 LCO5 Comparison with previous forecasts Figure 3-11 shows differences in GSP forecasts provided by NIEIR in 2012 and KPMG in The bars compare annual percentage growth in real GSP forecasts. The bars also highlight different starting years, and show that NIEIR has used one extra year of data to develop the forecasts. The lines compare annual cumulative percentage growth in real GSP forecasts (for example, if GSP grows by 3% a year for 10 years, at the end of the 10-year period growth has accumulated to 34%), and show that differences in forecasts exist from to In the short-term, annual GSP growth for NIEIR s medium scenario forecasts are moderate at around 1.3%. This is a result of a weak industry sector leading to low growth in the short term Electricity prices Figure 3-12 shows forecast average annual growth in residential, business (non-residential) and total electricity prices for the medium scenario. From to , moderate growth in Tasmania s economy and population results in an average annual increase of 3.3% in electricity prices for the medium scenario. In , NIEIR forecasts a large (real) price increase of approximately 13% for total electricity prices, driven by forecast large increases in electricity prices in the business sector. 26 Regional economic outlook AEMO 2012

35 Electricity prices (annual % growth) Real GSP (annual % growth) Real GSP (cumulative % growth) Figure 3-11 Comparison of current and previous GSP forecasts for Tasmania Year NIEIR 2012 KPMG 2011 NIEIR 2012 KPMG 2011 Figure 3-12 Electricity prices for the medium scenario for Tasmania Year Residential Business Total (Residencial + Business) AEMO 2012 Regional economic outlook 27

36 Real GSP (annual % growth) ECONOMIC OUTLOOK INFORMATION PAPER 3.5 Victoria Victorian GSP has recovered ground since the GFC, reporting increased growth rates of 2.3% and 2.4% in and , respectively. The Victorian Government is developing a comprehensive productivity reform agenda to improve Victoria s competitiveness and stimulate the economy. Over the medium term, a positive outlook for Victoria s major trading partners in Asia is expected to support increased growth for exports. According to the IMF, in the short term, growth is expected to be approximately 9.5% in China and 8% in India, while growth in other Association of Southeast Asian Nations (ASEAN) economies is forecast to be moderate Economic growth (GSP) From to , GSP forecasts for Victoria are expected to grow by approximately 3%. Industry in Victoria was severely affected by the GFC but showed significant recovery by However, it is expected that growth will moderate in the short term, despite the strong labour market and boost to real household incomes from the high terms of trade. This moderate level of growth is driven by recent weakness in retail sales, easing consumer sentiment, and the high household saving rate. In the past, conditions in the industry sector have contributed significantly to Victorian investment, specifically in the manufacturing sector. From to , this sector is expected to moderate in an economic environment influenced by a strong Australian dollar and national capacity constraints. Victorian businesses will also need to compete with mining operations for investment resources. Overall, conditions for future business investment in Victoria are positive, particularly with the improved affordability of imported machinery and equipment as a result of the high Australian dollar. Figure 3-13 shows actual and forecast growth rates for GSP for the three main scenarios. Figure 3-13 GSP forecasts for Victoria Year Actual MCO5 HCO5 LCO5 28 Regional economic outlook AEMO 2012

37 Real GSP (annual % growth) Real GSP (cumulative % growth) Comparison with previous forecasts Figure 3-14 shows differences in GSP forecasts provided by NIEIR in 2012 and KPMG in The bars compare annual percentage growth in real GSP forecasts. The bars also highlight different starting years, and show that NIEIR has used one extra year of data to develop the forecasts. The lines compare annual cumulative percentage growth in real GSP forecasts (for example, if GSP grows by 3% a year for 10 years, at the end of the 10-year period growth has accumulated to 34%), and show that there are only small differences between the forecasts. Over the next 5 years, NIEIR forecasts growth to be approximately 3% with expectations of a stronger housing sector as a result of recent falls in interest rates. However, a weak manufacturing sector and a low employment rate are holding back growth. Figure 3-14 Comparison of current and previous GSP forecasts for Victoria Year NIEIR 2012 KPMG 2011 NIEIR 2012 KPMG 2011 AEMO 2012 Regional economic outlook 29

38 Electricity prices (annual % growth) ECONOMIC OUTLOOK INFORMATION PAPER Electricity prices Figure 3-15 shows forecast average annual growth in residential, business (non-residential) and total electricity prices for the medium scenario. In , NIEIR forecasts a large (real) price increase of approximately 6% for total electricity prices. This is followed by two consecutive years of negative price growth, driven by a decrease in the CPI from to , and the completion of the Essential Services Commission Advanced Metering Infrastructure roll-out of Victoria's electricity smart meters for residential and small business electricity customers. 4 From onwards, growth is forecast to be less than 1% on average. Figure 3-15 Electricity prices for the medium scenario for Victoria Year Residential Business Total (Residencial + Business) 4 Australian Energy Regulator, Victorian Advanced Metering Infrastructure Review: budget and charges applications. October Table 2, AER Final Determination forecast charges for single-element meters, page 8, available %20AMI%20budget%20and%20charges%20applications% pdf. Viewed May Regional economic outlook AEMO 2012

39 APPENDIX A - DRIVERS OF ECONOMIC SCENARIOS Four drivers help define AEMO s five economic scenarios (for more information about the scenarios, see Section 0): Global economic outlook and productivity assumptions. Carbon price assumptions and trajectories. Demographic assumptions. Fuel price assumptions. The first two of these are briefly discussed in the following sections. A1 Global economic outlook and productivity assumptions The assumptions that define the global economic outlook for the five scenarios relate to Australian and global economic growth, productivity growth and commodity prices. A1.1 Australian and global economic growth For the medium scenario, Australian economic growth is expected to continue at the current level. In accordance with the RBA, Australia s GDP increased to approximately 2.75% in 2011, and is projected to grow at the historical average of 2% to 3% in the short to medium term. 5 The global economy is expected to show signs of recovery with ongoing growth for Australian commodities, particularly in the mining sector. A1.2 Productivity growth Higher growth in real GDP is associated with higher productivity growth. After the GFC, growth in Australian labour productivity showed signs of a healthy recovery due to the efficient reallocation of factors of production. For the medium scenario, productivity growth is associated with an improvement in labour market conditions, especially in the mining sector. The RBA states that growth in employment is expected to increase in the short to medium term, as activity gradually strengthens throughout 2012, but only to the extent that it will allow the unemployment rate to stabilise at around 5.25%. A1.3 Commodity prices Prices for most commodities are expected to remain at elevated levels in line with a more optimistic global outlook, and this is expected to lower pressure on global inflation rates. 5 Reserve Bank of Australia. Statement on Monetary Policy, February 2012 pp 67, Table 6.1: Output growth and inflation forecasts. AEMO 2012 Drivers of economic scenarios A1

40 ECONOMIC OUTLOOK INFORMATION PAPER A2 Carbon price assumptions and trajectories The introduction of a carbon price mechanism was announced by the Australian Government in July 2011, after an agreement reached by the Multi-Party Climate Change Committee. 6 Recent modelling work by Treasury for the Australian Government s Clean Energy Future Plan has led to several carbon price assumptions: 7Fixed carbon pricing will start on 1 July 2012, at a nominal price of $23/t CO2-e, rising to 2.5% in real terms for the subsequent two years. A flexible phase will be introduced on 1 July 2015, with the carbon price determined through an emission trading scheme (ETS) with a transitional price cap and floor applied. Real growth in the carbon price of 5% per year on average plus inflation from onwards. This legislation is designed to achieve a reduction in Australian carbon emissions of 5% below 2000 levels by 2020 with a long-term target to cut pollution by 80% below 2000 levels by The carbon emission reduction targets and carbon prices that underpin each scenario are consistent with the proposed carbon prices established as part of the Treasury core policy scenario. 8 Table A-1 presents the assumed carbon price trajectories for all five scenarios. Carbon prices in all scenarios start at a nominal price of $23/t CO2-e, and rise by 2.5 % per year in real terms for the first three years from 2012 to Carbon prices after mid-2015 for the medium (MCO5) and low (LCO5) scenarios are equivalent to the Treasury core policy scenario. In comparison, carbon prices under the high (HCO25) scenario are consistent with the Treasury high price scenario, and under the low (LCO0) scenario are assumed to be zero from 2015 onwards. 6 The Australian Government s Treasury and the Department of Climate Change and Energy Efficiency modelled the potential economic impacts of reducing emissions over the medium and long term proposed in the Strong Growth, Low Pollution, Modelling a Carbon Price Report, released on 10 July 2011, available Viewed May See note 4. 8 See note 4. A2 Drivers of economic scenarios AEMO 2012

41 Table A-1 Carbon price trajectories ($/t CO2-e) MCO5 HCO5 HCO25 LCO0 LCO5 ( real prices) (2010 nominal prices) (2010 nominal prices) (2010 nominal prices) (2010 nominal prices) (2010 nominal prices) CO2-e emissions reduction target by % 5% 5% 25% 5% 5% AEMO 2012 Drivers of economic scenarios A3

42 ECONOMIC OUTLOOK INFORMATION PAPER [This page is left blank intentionally] A4 Drivers of economic scenarios AEMO 2012

43 APPENDIX B - GLOBAL ECONOMIC OUTLOOK Australian economic outcomes are influenced by changes in the global economy, including impacts on Australian exports, inflation, commodity prices, and terms of trade. Based on the Global Financial Stability Report published by the IMF 9, in 2012, global economic growth is projected to grow by 3.3%. The IMF has revised down its 2013 estimate to 3.9%, largely because the euro area economy is expected to go into a mild recession in B1 Asia Growth in Asian economies has shown a progressive increase in line with increasing demand for commodities. The IMF estimates GDP growth in 2012 to increase in China by 8.2%, and in India by 7%. As a major Australian trading partner, China s economy grew 8.9% in the 2011 December quarter. NIEIR s analysis forecasts that China will surpass the United States as the world s leading economic power in the long term, measured by three aspects of the economy: the size of the economy (GDP), the terms of trade, and the extent to which it is a net creditor. It is predicted China will pass the United States in size by around 2014 or By 2030, given the projections across the scenarios, China will be nearly double the size (80% larger) of the United States in GDP terms, and four times the size in trade terms. Even if China does not fully remove capital controls, the Chinese Yuan could replace the United States dollar as the world reserve currency by B2 Europe The effect of the Euro s uncertainty in relation to sovereign risk is having an impact on financial costs and credit availability. The euro area authorities have applied fiscal and monetary stimulus to control sovereign debt and banking sector problems. Nevertheless, it is considered that further measures are still required to restore the competitiveness of the worst-affected economies to ensure more sustainable debt profiles. According to NIEIR s analysis, the rapid withdrawal of fiscal stimulus is one of the main reasons for the forecast low growth rate (less than 3%) for the global economy in The fiscal stimulus during 2010 and 2011 was around 2% of global GDP. From 2012 onwards, changes in fiscal stimulus will reduce growth in the global economy by less than 2%. In comparison, the IMF has revised down its 2012 projections for economic growth for the euro area and warned that the crisis in Europe will also reduce growth in other nations. It was predicted that the total euro area GDP will show a contraction of 0.5% in 2012, reducing from a previous forecast of 1.1% growth, before returning to an increasing growth rate of 0.8% in IMF World Economic Outlook Update. Global Recovery Stalls, Downside Risks Intensify released January 2012, available Viewed May AEMO 2012 Global economic outlook B1

44 ECONOMIC OUTLOOK INFORMATION PAPER B3 United States of America Since the second half of 2011, the United States of America has shown slow signs of recovery, although there is still considerable spare capacity in the labour market and broader economy. The economy has grown at an annual rate of 3% in the last quarter of 2011, but this growth is expected to ease early in 2012 and to marginally increase by the end of the year. According to the US Department of Commerce, the economy grew 1.7% in 2011 and is forecast to grow by around 2% in The IMF has maintained an economic growth forecast for the United States at 1.8%, but pegged 2012 growth at 2.2%. The United States and other advanced economies would be affected if the European crisis intensifies and Greece defaults on its international financial obligations. Another big challenge for the United States is to significantly lower the unemployment rate. B4 Oil prices and global inflation NIEIR forecasts that oil prices (either in terms of their actual outcomes or the threat that they reach unsatisfactorily high levels) are expected to have a significant influence on global growth prospects from 2013 onwards. By 2020, oil prices are projected to approach US$200 a barrel unless global growth is sharply reduced (assumed in the medium scenario). Over the next two years, if the political instability in the Middle East escalates to the point of threatening Israel s short-term economic and defence security, then oil prices could increase rapidly. This represents one of the mechanisms that could shift the medium scenario towards the low scenario over the next five years. The IMF announced that global oil prices will likely only ease slightly in 2012 despite slowing global growth. Its baseline oil price projection was broadly unchanged since September 2011, when it forecast the oil price to be US$100 a barrel. NIEIR forecasts that global inflation is expected to be between 3% and 4% per annum for the next two years. This will allow emerging economies to minimise the impact of downgrading growth in developed economies. B2 Global economic outlook AEMO 2012

45 DISCLAIMER This publication has been prepared by the Australian Energy Market Operator Limited (AEMO) as part of a series of information papers about the development of AEMO s demand forecasts for the National Electricity Market for onwards, to be used for AEMO s planning and operational functions under the National Electricity Rules. This publication may contain data provided by or collected from third parties, and conclusions, opinions, assumptions or forecasts that are based on that data. AEMO does not warrant or represent that the information in this publication (including statements, opinions, forecasts and third party data) is accurate, complete or current, or that it may be relied on for any particular purpose. Anyone proposing to rely on or use any information in this publication should independently verify and check its accuracy, completeness, reliability and suitability for purpose, and should obtain independent and specific advice from appropriate experts. To the maximum extent permitted by law, neither AEMO, nor any of AEMO s advisers, consultants or other contributors to this publication (or their respective associated companies, businesses, partners, directors, officers or employees) shall have any liability (however arising) for any information or other matter contained in or derived from, or for any omission from, this publication, or for a person s use of or reliance on that information. Copyright Notice Australian Energy Market Operator Ltd. This publication is protected by copyright and may be used provided appropriate acknowledgement of the source is published as well. Acknowledgements AEMO acknowledges the support, co-operation and contribution of all participants in providing the data and information used in this publication. AEMO 2012 Disclaimer C1

46 ECONOMIC OUTLOOK INFORMATION PAPER [This page is left blank intentionally] C2 Disclaimer AEMO 2012