The economy appears to be rebounding quicker than the Federal Government expected just weeks ago when the Budget was handed down in October.

Treasury had forecast the economy would shrink this financial year, in line with the nation slipping into its first recession in almost three decades.

But the mid-year economic and fiscal outlook (MYEFO) now projects gross domestic product (GDP) will grow 0.75 per cent, up from the earlier forecasted decline of 1.5 per cent.

"Australia is outperforming all advanced economies," Treasurer Josh Frydenberg declared when he released the updated Budget figures.

The improved Budget condition is thanks to soaring iron ore prices and more people being back in work than expected.

The Budget estimated 2.2 million Australians would be receiving the Government's JobKeeper wage subsidy in December.

That has now been revised to 1.6 million people, with the overall program now forecast to cost $90 billion, down from $101.3 billion.

MYEFO forecasts an official unemployment rate of 7.25 per cent at the end of this financial year, which is the same as the Budget forecast.

The Government expects unemployment will peak at 7.5 per cent in the first three months of 2021. It had earlier expected it to reach 8 per cent.

"With 734,000 jobs created over the last six months, the labour mark has performed better than we expected," Mr Frydenberg said.

Treasury is forecasting unemployment will further fall to 6.25 per cent by the middle of 2022 and to 5.25 per cent, a return to pre-pandemic levels, two years later.

"We have come a long way — a long way from Treasury's initial estimate that the unemployment rate could reach 10% or 15% without JobKeeper," he said.

The COVID-19 pandemic has created the biggest economic challenge for Australia since the Great Depression.

The boost in Government income has the Treasury forecasting a deficit of $197.7 billion at the end of this financial year.

That would still be a record deficit for the post-war era but below the October Budget estimate of $213.7 billion.

"There is a light at the end of the tunnel, but there is still a very long way to go in the Australia's economic recovery," Mr Frydenberg said.

China trade boom and busts

Australia is the world's largest iron ore exporter and Treasury has offered a conservative price forecast of $US55 a ton free-on-board by September next year.

Currently, iron ore prices are around $US150 a ton, thanks to high Chinese demand and production issues in Brazil.

If prices remain well above the $US55 forecast, Australia's budget will benefit from billions of dollars in additional revenue.

The surging iron ore sales to China comes amid a deteriorating relationship with Australia, which on Wednesday announced it would take its largest trading partner to the World Trade Organization (WTO) over a barley dispute.

Australian beef, wine, coal, lobsters, cotton, timber exports have all fallen victim to Chinese import tariffs this year, introduced in the wake of Australia calling for an investigation into the origins of the coronavirus pandemic in Wuhan.

Mr Frydenberg said those trade tensions, combined with slow population growth, a fall in migration and a closed international border all offered risks to Australia's recovery.

The Treasurer said global economic uncertainty would likely lead to higher Australian household savings and lower consumption levels.

He said the effectiveness of a vaccine would also be crucial to the recovery.

Story By | Brett Worthington