Economic growth forecasts downgraded

Economic growth forecasts have deteriorated significantly in the government's mid-year budget update, while jobs forecasts have strengthened.

(AAP) Source: AAP

Deteriorating forecasts for Australia's economic growth suggest the path to budget surplus will be a long one, with economists doubtful about the federal government's 2020/21 prediction.

The economy is expected to struggle along for a while yet with growth forecasts downgraded in the government's mid-year budget update on Tuesday.

Economic growth is expected to come in at 2.5 per cent in 2015/16, remaining below trend at 2.75 per cent in 2016/17 - a significant deterioration from the 3.25 per cent forecast in the May budget.

As economists widely predicted, the mid-year economic and fiscal outlook also shows a blowout in the budget deficit.

The deficit is now expected to come in at $37.4 billion this year, compared with the budget forecast of $35.1 billion, remaining at $14.2 billion by 2018/19.

The return to surplus has been pushed out another year, to 2020/21 - but CommSec economist Savanth Sebastian says even that's "probably unlikely".

"If anything, we've disappointed over the past few years in terms of growth and activity," he says.

And next year is likely to deliver more disappointment, with further slides in commodity prices expected.

HSBC chief economist Paul Bloxham said Tuesday's update repeated the "pattern of continued budget disappointment".

"There will be a formidable challenge in terms of getting back to an eventual budget surplus," he said.

"A lot can happen between now and 2020/21 - anything can happen."

The good news is that unemployment forecasts have rebounded, with the jobless rate now expected to peak at six per cent next year instead of the previous 6.5 per cent forecast.

Treasurer Scott Morrison says the upbeat employment estimates may even be "too conservative" given the whopping 340,000 jobs added to the economy in the past 12 months.

The Australian economy was heading in the right direction, demonstrating resilience in the face of strong global head winds.

He insists Treasury's "more realistic outlook" for economic growth should be seen "as a statement of confidence".

The government remained "patiently and responsibly on the path to budget balance" despite revenue write-downs of almost $34 billion, courtesy of plummeting commodity prices, a declining terms of trade and weaker global growth.

"We have adopted a measured approach, avoiding extreme responses that would place a hand brake on household consumption and business investment growth and unnecessarily threaten the fresh new momentum emerging in our transitioning economy," the treasurer said. Inflation is forecast to remain between the Reserve Bank's two-to-three per cent target range.