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%