Economic growth forecasts downgraded

Economic growth forecasts have been significantly downgraded in the mid-year budget update.

Economic growth forecasts have been significantly downgraded in the mid-year budget update. (AAP)

The federal budget deficit is expected to narrow but so is economic growth, with the mid-year update revealing significant downgrades following shockingly weak September quarter figures.

Economic growth is expected to come in at two per cent in 2016/17, remain below trend at 2.75 per cent in 2017/18 before picking up to three per cent in 2018/19, according to the mid-year economic and fiscal outlook released on Monday.

It's a deterioration from the May budget, which had GDP at 2.5 per cent in 2016/17 and three per cent in 2017/18 and followed shock September quarter growth figures showing the economy posted its worse performance since the global financial crisis.

Inflation forecasts have also been downgraded to 1.75 per cent in 2016/17 from two per cent - below the Reserve Bank of Australia's preferred two-to-three per cent target range.

What hasn't changed is the forecast return to a budget surplus, which is still expected in 2020/21.

The update shows a slight improvement for the budget deficit, which is now expected to come in at $36.5 billion in 2016/17 instead of the $37.1 billion forecast in May.

In a joint statement, Treasurer Scott Morrison and Finance Minister Mathias Cormann said the economy was continuing its transition in the wake of the mining investment boom, despite the downward revision to growth forecasts.

"Economic growth is expected to increase over the forecast period, as the drag from the decline in mining investment dissipates and the economy transitions to broader-based growth, supported by historically low interest rates and a lower Australian dollar," they said.

"Exports and household consumption are expected to support growth, with dwelling investment higher in the near term."

Non-mining business investment was expected to pick up modestly in coming years, despite volatility in commodity prices making forecasts challenging.

"To support economic growth the government will continue to implement our national plan for jobs and growth," the ministers said.

Treasury's unemployment forecasts remain largely unchanged from May, at 5.5 per cent for 2016/17 and 2017/18 with a slight downgrade in projections for the final two years of the forward estimates - from 5.5 per cent to 5.25 per cent.