"The global economy entered 2017 with more momentum than earlier expected. Along with various survey indicators pointing to improved sentiment, growth in global industrial production and merchandise trade have picked up. Partly reflecting the run of recent data, the outlook for GDP growth in Australia's major trading partners has improved. GDP growth in China has been stronger than earlier anticipated, supported by accommodative macroeconomic policies, although growth is still expected to slow over coming years and the credit-based financing of some of the expansion poses risks. The largely policy-induced rebound in residential investment in China has spurred stronger demand for construction-related materials, such as steel, which in turn has boosted demand for iron ore and coal. High and rising debt, combined with excess capacity in some sectors, remains a risk to the medium-term outlook for growth in China. Growth in the major advanced economies is expected to be above potential, although there is significant uncertainty around policy in the United States and its effect on global growth and prices.

The prices of bulk commodities increased significantly over the past year. Australia's terms of trade have consequently risen by more than 15 per cent since mid 2016, following the large falls over the previous few years. These higher price levels are unlikely to be sustained. Coal prices have already fallen from very elevated levels, partly because some earlier supply disruptions have been resolved. Also, additional low-cost iron ore production from Australia and Brazil is expected to come on line over the period ahead. The forecasts accordingly assume that much of the recent increase in the terms of trade and commodity prices will be unwound over the next couple of years, although the terms of trade are expected to remain above the lows of a year ago".