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.