Saturday, November 05, 2011

Downgrade. Your forecasts won't be met - Reserve

How Treasury saw economic growth in May:

How the Reserve Bank sees it now:

The Reserve Bank has dramatically downgraded its view of the Australian economy, throwing into doubt budget forecasts and calling into question the government’s promise of a surplus by 2012.

The sharply lower forecasts have economic growth at 3.25 per cent this financial year rather than the 4 per cent forecast in the budget, and 3.25 per cent in 2012-13 rather than the budget forecast 3.75 per cent.

The statement from the Bank says the risks to its new view are “skewed to the downside,” meaning it has little optimism the budget targets can be met.

The Age
The May budget forecast a deficit of $22.6 billion this financial year followed a small surplus of $3.5 billion in 2012-13. The Reserve Bank’s updated assessment means the government could be perhaps as much as $10 billion short as it tries to meet what are turning out to be overoptimistic profit and jobs forecasts.

The budget forecast a 28.9 per cent boost in company tax revenue. The Reserve Bank says profits are up 20 per cent and that measures of business confidence have “fallen noticeably” since the start of the financial year.

The budget forecast an extra half a million new jobs over two years. The Reserve Bank says jobs growth has slowed and will be “more subdued” than would be usual with anticipated economic growth because the mining industry is relying heavily imported equipment.

“For example, the $146 billion of liquefied natural gas projects currently underway or committed will be relying extensively on imported large modularised components.,” the Bank says.

Capital equipment imports, such as bulldozers, excavators, rubber tyres and metal structures, have climbed 75 per cent in the past five years...

Whereas the Bank had been forecasting domestic inflation well beyond its target it now expects underlying inflation to stay within its 2 to 3 per cent target band for at least the next two years.

Significantly its new forecasts use the “technical assumption” of no further interest rate cuts rather than factoring in market pricing as it has done when it believes moves are likely.

The market is pricing in four more cuts by May.

The Bank says since its last report three months ago iron ore prices have fallen 34 per cent, coking coal prices 21 per cent, copper prices 14 per cent and wool prices 10 per cent. Its commodity price index slid 5 per cent in September and October for the first time in two years.

The biggest risk to its forecasts is a meltdown in Europe. “The Bank’s central scenario continues to be one in which the European authorities do enough to avert a disaster, but are not able to avoid periodic bouts of considerable uncertainty and volatility,” it says.

A deep recession in Europe would represent “a downside risk for the Australian economy”.

Treasurer Wayne Swan yesterday acknowledged his own budget forecasts would be downgraded when he released the mid-year budget update later in the year.

“We will have less revenue than we expected when we did our Budget forecast back in May,” he told reporters in Sydney. “We’re simply not immune from the fallout of what’s occurring in the global economy. For example we’ve seen a very significant hit on our share market – that affects revenues. We’ve seen an impact on confidence – that affects revenues. There’s no doubt that as a consequence of this global instability, growth in Australia will be lower than we expected at the time of the Budget.”

Published in today's SMH and Age

Recommended reading: RBA Statement on Monetary Policy November 2011

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