Monday, July 14, 1997

1997-98 Economic Survey. 200,000 new jobs tipped

Tim Colebatch:

Market economists have largely endorsed the Federal Government's forecasts of a strong economic recovery in the new financial year, predicting that jobs and output will take off in the 12 months to June.

The Age half-yearly survey of economists found that on average they expected Australia's gross domestic product to grow by 3.8 per cent in the year ahead, almost exactly matching the Budget forecast of 3.75 per cent growth.

Most significantly in political terms, the economists on average are tipping employment to grow by 2.3 per cent in the 12 months to June 1998, adding almost 200,000 new jobs, also in line with the Budget forecast.

That would more than treble the job growth actually recorded in the 12 months to June 1997, when just 61,000 jobs were created and full-time employment fell by 34,000.

But unemployment is tipped to fall less than the Government predicts. The economists on average forecast it to be still 8.3 per cent by next June, midway between last month's 8.7 per cent and the Budget forecast of 8 per cent next June.

The group verdict amounts to a solid vote of confidence in the Budget forecasts, despite a generally gloomy run of statistics and business surveys since the Budget was delivered on 13 May. It implies that the economy is about to change gear - probably moving up two gears in the space of months.

But with the recovery the economists foresee two minor drawbacks. Interest rates and the dollar are expected to start heading back up, reversing the slide that has allowed business some relief from the tight conditions of late 1996.

Ten-year bond rates are expected to climb back to 7.3 per cent by Christmas and 7.6 per cent by the end of next June.

Despite the expectation of an interest-rate cut next month, 90-day bill rates were tipped to be back to 5.4 per cent by December, rising to 5.8 per cent by June 1998. But if it's any consolation, the panel got all this totally wrong a year ago. Expecting much stronger growth than the economy delivered, on average it tipped 90-day bills at 30 June 1997 to be 7.9 per cent, almost half as high again as the actual 5.35 per cent.

Similarly, the banks were expected to be offering home mortgage loans at 9.8 per cent (actually 7.2 per cent) and 10-year bonds were tipped to be 8.8 per cent (actually 7.09).

On the financial front, even the most optimistic forecasters - Mr Des Moore, of the Institute of Private Enterprise, and Mr Don Harding, of the Melbourne Insitute - proved far too conservative last year. And the economists were far too optimistic on employment growth, predicting a 2 per cent rise in jobs rather than the 0.75 per cent we actually got. But Mr Phil Graham, of ANZ Securities, was spot-on, with Mr Harding the only other one to get close.

This year, Mr Graham has joined the optimists, predicting employment to grow by 2.6 per cent despite foreseeing the dollar bounding back to 82 US cents and 92 yen by June 1998.

Overall, the latest forecasts show a high degree of consensus. In detail:

GDP is forecast to grow by between 3.2 and 4.5 per cent, with all but six forecasters within the range of 3.5 to 4.3 per cent. At the top end, Mr Bill Shields, of Macquarie Bank, is predicting that low interest rates will promote an investment-led recovery, with business and housing investment alike growing by 12 to 12.5 per cent.

At the bottom end, Mr Saul Eslake, of ANZ Bank, also sees the housing recovery lifting investment in dwellings by 13 per cent, and business investment rising by 7.7 per cent. But he predicts private consumer spending will remain subdued, growing only 2.5 per cent, whereas most forecasters on average predict an increase of 3.3 per cent.

Business investment is one of the few areas where the forecasts diverge widely. Mr Shields is the most optimistic of the 31 forecasters with his tip of 12.3 per cent growth, a far cry from the 2.6 per cent rise in investment plans revealed to the Bureau of Statistics.

But at the other end, Mr Richard Robinson, of BIS Shrapnel, forecasts business investment will grow just 2.1 per cent this financial year. BIS is perhaps the most pessimistic of all forecasters overall, seeing GDP rising just 3.3 per cent, unemployment still 8.7 per cent in a year's time and the dollar and interest rates rising. (Over the past five years, BIS Shrapnel has proved the most reliable GDP forecaster in The Age survey.)

Trade is expected to detract from GDP again, with imports outpacing exports enough to take 0.3 percentage points off the nation's output. Mr Paul Brennan, formerly of the National Farmers Federation but now with County NatWest Securities, is the most pessimistic, predicting net exports to drag GDP down by 1.2 percentage points (about $6 billion) and the current-account deficit blowing out to $26 billion.

At the other extreme, Mr Mike Nahan, of the Institute of Public Affairs, forecasts net exports to add 0.75 per cent ($4 billion) to GDP growth, even though he sees the current-account deficit worsening by $4 billion, growing to $22 billion.

Wage growth is seen as moderating slightly, with forecasters on average tipping 4 per cent for the year to June. But two forecasters see wage growth blowing out to 5.1 per cent while two see it falling sharply to 3 or 3.1 per cent.

Unemployment is generally seen as staying between 8 and 8.5 per cent, although two forecasters - Mr Brennan and the Bankers Trust economics group - predict it will edge down to 7.9 per cent by June.

The Budget is expected to return a bottom line on average of $3.4 billion, slightly better than the Government's prediction of an underlying deficit of $3.9 billion. But among the pessimists is Mr Alan Oster, of National Australia Bank, who predicts that as growth falls short of the Budget forecast, so the underlying deficit will end up at $5 billion.

Interest rates yield a more diverse range of forecasts. At the pessimistic end, Ms Mardi Dungey, of Econtech, predicts that by June 90-day bank bills will be at 7 per cent despite very low growth in consumer spending (1.6 per cent) and wages (3.3 per cent). But Mr Nigel Stapledon, of Westpac, tips little change over the next year, with the 90-day rate still at 5.1 per cent and 10-year bonds at 6.8 per cent.

The dollar is generally seen as drifting back up, although there is no consensus. Mr Bruce Hockman, of Deutsche Morgan Grenfell, sees it soaring to 82 cents and 94 yen by next June while Mr Steven Shepherd, of VECCI, and Mr Peter Osborne, of Merrill Lynch, see it nudging 100 yen by then.

Mr Chris Cheatley, of the EIU, thinks the dollar will lock in its recent fall, staying at 74 cents through to next June, as does Mr Simon Calder, of J.B. Were.

Foreign debt is expected to climb again to $216 billion by July, with the current-account deficit on average tipped to rise to $21.6 billion compared with about $18 billion in the year just ended.

Mr Eslake and Mr Oster disagree, predicting that relatively slow growth will hold the deficit around present levels. But Mr Shane Oliver, of AMP Investments, predicts it will blow out to $27 billion, boosted by higher interest rates and sluggish world growth.


Monday, January 06, 1997

1997 Economic Survey. Economists tip glum half-year

Paul Chamberlin:

A rapid relaxation of monetary policy in the second half of 1996 has not been enough to brighten the economic hopes of Australia's leading forecasters, who see growth continuing to fall and little improvement in unemployment.

Six months of indifferent economic performance will be followed by a similar span in 1997, according to The Age's six-monthly survey of 28 economists from business, academia and the financial sector.

Amid the sober predictions are others that will please home owners - half of those surveyed believe the Reserve Bank has too tight a grip on interest rates, arguing for another cut in the new year. Only one, Econtech's Mr Chris Murphy, thinks monetary policy is too loose and that rates should climb, while 11 believe it is now "about right".

And inflation appears to be a word of the past. The average forecast is 1.7 per cent for the four quarters to June, significantly below the 2.5 per cent predicted by much the same group only six months ago.

In a further pointer to new interest rate cuts, wages growth should average 3.7 per cent to June, well below the Reserve Bank's speed limit of 4 to 4.5 per cent.

The central bank has been concerned about accelerating wage demands, but the economists point to a consistent lack of underlying pressure. They predict weekly earnings will again average 3.7 per cent over the four quarters to December.

By implication, they believe the ACTU's Living Wage claim - which the Government believes could spur inflation and reduce employment - will not succeed in its entirety.

Following up his July prediction of only 2.5 per cent economic growth in 1996-97, Mr Don Harding, of the Institute of Applied Economic and Social Research, again claims the low mark with a revised 2.3 per cent.

Close by are National Australia Bank's Mr Alan Oster with 2.4 per cent, and Westpac's Mr Nigel Stapledon with 2.5 per cent. This is actually an improvement for the latter, who thought six months ago growth would splutter along at 2.2 per cent.

At the other end of the scale is Mr Michael Heffernan, formerly with the Australian Stock Exchange, who plumped for an extremely healthy rise in gross domestic product of 4.7 per cent over the year, down from his 5 per cent tip in July.

No others are even in range of this robust view but Mr Bill Shields, from the Macquarie Bank, forecasts 3.9 per cent.

The biggest revision comes from SBC Warburg's Peter Horn, who has dropped his 4.6 per cent prediction to 3.4 per cent, below the Government's Budget forecast of 3.5 per cent.

Unemployment appears resolutely stuck above 8 per cent. No one believes it will drop below that rate by the end of June, and only Mr Heffernan predicts it will slip below that level by December, to 7.9 per cent.

The average forecast is 8.8 per cent by the end of the financial year, rebounding from November's 8.5 per cent. Victoria's rate will be 9.1 per cent seasonally adjusted, down slightly on the 9.2 per cent officially recorded in November.

The economists remain apprehensive about any significant pick-up by December. Unemployment will still be at 8.5 per cent Australia-wide, and 8.9 per cent for Victoria, they say.

Mr Murphy is pessimistic about a recovery in Victoria's labor force, predicting it will be floating at 9.8 per cent in June and 9.5 per cent in December. Mr Tony Pensabene, of the Australian Chamber of Manufactures, believes it will remain rooted at 9.5 per cent at both points.

Close to the Government's Budget forecast of 8.25 per cent are VECCI's Mr Steven Shepherd (8.2), Dr Philip Adams of Monash University's Centre of Policy Studies and the Commonwealth Bank's Mr Bruce Freeland (both 8.3).

The reluctance to embrace the Government's prognosis on jobs is based on recent figures showing employment is growing at nowhere near enough to meet the Budget hope of 2 per cent for 1996-97. The average expectation is only 1.5 per cent (advancing to 2 per cent for the 12 months to December), with Mr Nigel Douglas, of Merrill Lynch, arguing it will only reach 0.5 per cent this financial year.

The economists as a whole are confident the Budget claim of a $5.6 billion deficit will be met. Individually, however, there is wide variation in the forecasts: Macquarie Bank's Mr Shields tips a $500 million surplus and Mr Phil Graham, of ANZ Securities, sees a blowout to $7 billion.

Net foreign debt is expected to knock on the door of $200 billion by June and crash through to $202 billion by December. It follows a further $19.5 billion deterioration in the current account, down slightly on the $20 billion the Government expects.

The old gauges of full employment, where the rate of unemployment was 5, 4 or even as low as 2 per cent, no longer apply in the minds

of the economists. Most take a similar view to Dr Shane Oliver, from AMP Investments, feeling the level is now around 7 per cent but that it could fall as low as 5 per cent after further labor market deregulation and micro-economic reform.

Mr Graham said that while full employment was difficult to define, it now meant unemployment of between 7 and 8 per cent.

"Such an outcome is too high from the community's point of view, but significant progress in lowering unemployment towards a more acceptable level will require more micro-economic reform (including more radical industrial relations reform)," he said.

"While Australia dawdles, the rest of the world is steadily becoming more efficient. There is a strong need to increase the efficiency of Australian infrastructure, and doing so would reduce the cost of doing business in Australia and help all industry (rather than assist specific industries)."

Merrill Lynch's Mr Douglas said 5 per cent unemployment remained a viable target in the long term if the Government adopted the United States social security system, which now cuts people off after set periods.

Mr Mark Jolley, from Deutsche Morgan Grenfell, put his answer to the question of full employment in simple terms. Australia would have full employment when there was "a job for everyone who wants to work, at the prevailing wage without putting sustained pressure on wages".

Mr Rob Henderson, of Dresdner Australia, said the area of industry policy most in need of reform was the relatively high level of import protection afforded to the production of motor vehicles and textiles, clothing and footwear.

Even if our trading partners did not reciprocate with micro-economic reform of their own industries, the benefits for Australia's already largely reformed manufacturing sector had become apparent in it being internationally competitive and providing a growing percentage of exports.

Westpac's Mr Stapledon said the Howard Government had come under strong pressure from some quarters to return to more interventionist policies. It had resisted them and should continue to do so.

But National Australia Bank's Mr Oster said more attention needed to be given to specific industry requirements, rather than the Government implementing broad industry policies.

Mr Richard Robinson, from BIS Shrapnel, said three key elements were needed: a long-term strategic plan; targeted sectoral plans, and a return to the 150 per cent tax concession for research and development.

The Australian Chamber of Manufactures' Mr Pensabene questioned whether the Government even had an industry policy, while Mr Tim Toohey, from the National Institute of Economic and Industry Research, was one of many who suggested immediate tax reform.

Mr Chris Cheatley, of the Economic Intelligence Unit, was critical of a lack of communication from the Government on its industry policy: "Business does not know where it stands."

What is a sustainable rate of growth or Australia?

Stephen Koukoulas, Citibank: 3.5 to 3.75%. It has increased thanks to labour market flexibility, lower tariffs and the drive for greater competition.

Chris Caton, Bankers Trust: 3.5%. But that's in a built-up area. At present we're on the highway so we can drive a little faster, say 4.5%.

Michael Heffernan, formerly ASX: 5%. Given the twin forces of low inflation and the increasingly deregulated labour market and industrial environment.

Phil Graham, ANZ Securities: 3.5%. Micro-economic reform to free up capacity constraints might allow this speed limit to be raised.

Phil Graham, ANZ Securities: Given Australia's long term balance of payments problem, somewhere in the region of 3 to 3.5%.


Highest prediction for GDP growth: 4.7%

Lowest: 2.3%

Average: 3.1%

Government Budget forecast: 3.5%