Thursday, July 02, 1998

1998-99 Economic Survey. Asia to hit growth

Philip Hudson:

Lower export sales, weaker job growth and depressed consumer and business confidence due to the Asian economic crisis will combine to cut Australia's growth rate in the new financial year, according to the Age half-yearly survey of economists.

But while some experts believe up to three percentage points could be wiped from growth, there is a majority view that the worst of the Asian crisis will be over by the year 2000.

Economists were asked by The Age to predict how many percentage points the Asian economic crisis would subtract from Australia's rate of economic growth in 1998-99 and 1999-2000.

Nikko Securities' chief economist, Mr Peter Horn, said the effects of the Asia slowdown would cut 3 percentage points from growth this year and 0.75 per cent next year.

"The direct effect of lower exports will detract two percentage points in 1998-99 and indirect effects, including lower employment growth and consumer spending and deferred business investment will detract 1 percentage points," he said.

ANZ's economist, Mr Saul Eslake, said Australia's heavy trade reliance on Asia would cut growth by 1.5 per cent this year and a further 1 per cent for the following year.

"Asia's financial crisis is one of the largest of the post-war era and will cost Asian economies at least 20 percentage points in terms of forgone growth relative to trend over the next four to five years," Mr Eslake said.

"Australia is more exposed to these losses than any other non-Asian OECD country. Direct losses through weaker exports and (eventually) heightened import competition will be compounded by income and employment losses and by adverse effects on business and consumer confidence."

Mr Steven Shepherd, from the Victorian Employers Chamber of Commerce and Industry, said domestic consumption would remain robust but cheap Asian imports and weaker business investment would cut growth by 0.75 per cent each year.

The Australian Chamber of Manufactures' Mr Tony Pensabene said the Asian economic crisis would hurt business much sooner and harder than originally anticipated.

"Key metals and engineering industries are highly exposed to Asia and given these are among our largest corporations the effects are flowing quickly through the rest of the economy," he said.

Mr Steven Kates, from the Australian Chamber of Commerce and Industry, believes that, barring any destabilising developments, most of our trading partners should be well into recovery by 1999.

"There are, however, still enormous downside risks, particularly if the measures taken to revive the Japanese economy fail to achieve their intended aim," he said.

"This would be compounded by any serious downturn in the Chinese economy, which would significantly lower business confidence."

Mr Bruce Hockman from Deutsche Bank said that the Asian impact might not be as large as feared as many exporters were finding new buyers.

We'll take a big hit from Asia: economists

The Asian economic crisis could wipe as much as three percentage points from Australia's rate of economic growth in 1998-99, according to economists surveyed by The Age.

The brakes will be applied to the economy in the year ahead as the Asian slowdown reduces imports, dampens the hopes of the unemployed and hits consumer and business confidence.

But the dollar is predicted to rise after its slump last month.

The Age half-yearly survey of 28 economists also predicts inflation will rise, the Government is unlikely to meet its Budget surplus prediction and the current-account deficit and foreign debt will increase during 1998-99.

Every aspect of the Australian economy will be touched by the economic trouble in Asia. The overall prediction for economic growth in 1998-99 is 2.27 per cent - well below the Government's May Budget forecast of 3 per cent.

The pessimists are Mr Mike Nahan, from the Institute of Public Affairs, and Mr David Corby, from National Mutual Funds Management, who forecast a recession.

The most optimistic person in the survey was BIS Shrapnel's Mr Richard Robinson, who expects the economy to grow by 4.1 per cent.

Only two others predict growth will be stronger than 3 per cent while six said it would be less than 2 per cent.

Mr Peter Horn, from Nikko Securities, believes the Asia crisis will cut growth by three percentage points.

The outlook for employment is mixed, with most economists predicting job growth will be lower than the Government expects.

Three economists believe the jobless rate will be above 9 per cent by this time next year.

Yet 10 others have predicted the unemployment rate will be less than 8 per cent.

Wages are expected to grow by 3.85 per cent, which is below the Government's forecast 4.25 per cent.

There is broad agreement prices will rise by less than the Government's 2.75 per cent forecast.

Six economists are punting on a cut in interest rates.

And despite the dollar's recent plunge below 60 US cents, most economists believe it will be above that mark by Christmas.

Surprisingly, six of the experts believe the current-account deficit will be lower than the $31 billion forecast by the Government.

Not one of the economists surveyed believes the Treasurer, Mr Peter Costello, will do better than the May Budget prediction of a $2.7 billion surplus.

How the tipsters fared

OK, so 28 tipsters have told us what they think will happen to Australia in the next 12 months. But their forecasts differ, so the question any market punter should be asking is: what are these guys' records?

It is a fair question, given that in our Sunday paper's $50,000 investment race, racing tipster Lucky Phil has taken a commanding lead over the brokers investing in share portfolios. So we decided to benchmark past Age survey forecasts and came up with interesting results.

For example, on average, our panel does better than Treasury at tipping the Budget deficit. It also does better than Treasury at tipping growth rates: over the past five years, our panel's average tip has been within 0.5 percentage points of the actual growth rate.

Yet the panel, although dominated by market economists, is no good at tipping what markets will do with interest rates and currency. It tends to assume little change ahead; no one has predicted big shifts, such as the interest rate rises of 1994 or last year's currency plunge.

Let's look at the details:

GDP: The best news in today's survey is that Sydney consultants BIS Shrapnel forecast growth of 4.1 per cent for 1998-99. That matters because in the past five years, Shrapnel has been the most accurate forecaster of GDP in Australia.

On average, BIS Shrapnel has come within 0.3 per cent (percentage points) of tipping the actual growth rate each year. By contrast, the Treasury has been wrong on average by 0.7 per cent and the panel on average by 0.5 per cent.

Shrapnel won its gold medal partly in 1993-94, when it was one of few to predict the acceleration into rapid growth. And in four years since, it has scored two bullseyes and been within 0.5 per cent twice.

Runners-up, with an average error of 0.5 per cent, are Chris Cheatley of the Economist Intelligence Unit, Saul Eslake and predecessors at the ANZ Bank, and David Corby and predecessors at National Mutual. Corby is one of the two panelists now forecasting a recession.

EXCHANGE RATE: Last year blitzed the reputations of all exchange-rate forecasters. No one foresaw Asia dragging down the Australian dollar to these levels.

At the end of 1996, when the dollar was worth 79.65 US cents, the panel believed it would be the same a year later. By June 1997, when the dollar had fallen to 74.5 US cents, the panel forecast it would be at 77 US cents by now. On average, the best of the currency tipsters has been Alan Oster of the National Australia Bank. He virtually hit the bullseye in the 1995 and 1996 mid-year polls, came closest to tipping the dollar's plunge in late 1997 and has been on the leaders board in every survey.

Honorable mentions are also due to Peter Horn of SBC Warburg, Chris Murphy of Econtech, Chris Cheatley of the Economist Intelligence Unit and Des Moore of the Institute for Private Enterprise.

INTEREST RATES: Here too, the panel missed the big shifts. In July 1994, it saw little change ahead; short-term rates promptly rose 2.75 per cent in four months. By January 1995, with two exceptions, it tipped further rises of 1.75 per cent; instead, rates then held tightly. In July 1996, only two forecasters tipped any fall, let alone five drops, totalling 2.5 per cent.

In every mid-year survey since 1991, the panel has tipped short-term rates to stay within 0.5 per cent of current levels. In four of the past eight years, the actual outcome was outside the entire range of forecasts.

That said, the best recently has been Don Harding of the Institute of Applied Economic and Social Research, the only one to correctly tip the past two turning points. Alan Oster and Des Moore tipped one each.

BUDGET: Treasury ought to do far better than the private forecasters in tipping the Budget deficit. Not so. In most years, the Treasury and panel forecasts have been almost identical.

The big difference was in 1995-96, when Treasury forecast a headline surplus of $718 million, The Age survey tipped a $900 million deficit - and the outcome was a $5 billion deficit!

The accurate one in 1995-96 was Dr Philip Adams of the Centre of Policy Studies, who tipped a $5.6 billion deficit, while the National Institute of Economic and Industry Policy tipped $3 billion. In 1996, Treasury understated the headline surplus by $2 billion, and the panel by $2.3 billion. Only Paul Brennan, Nigel Douglas and David Lansley came close.

Will this year restore Treasury's reputation? Has BIS Shrapnel got it right again, or David Corby? See you next year.


Friday, January 02, 1998

1998 Economic Survey. Strong growth ahead tipped

Phillip Hudson:

The economy will continue to grow strongly in the year ahead, with the only wild card being the impact of Asia's economic troubles, according to economists surveyed by 'The Age'.

Inflation and home-loan interest rates are widely predicted to stay low, housing and private investment to pick up, and the unemployment rate to fall slightly in 1998.

The overall prediction for growth in 1997-98 is 3.7 per cent, virtually the same as the Government's 3.75 per cent Budget forecast that was restated in the mid-term review delivered on 18 December.

The most optimistic forecast in the biannual survey of economists from business, academia and the financial sector comes from BIS Shrapnel's Mr Richard Robinson, who expects the economy to grow by 4.3 per cent.

Other bullish forecasts were from Deutsche Morgan Grenfell's Mr Bruce Hockman, for 4.2 per cent, and Macquarie Bank's Mr Bill Shields and F.W. Holst & Co's Mr Michael Heffernan, for 4.1 per cent.

The pessimist is National Mutual Funds Management's Mr David Corby, who believes growth will be restricted to 2.5 per cent.

The outlook for employment growth is generally stronger than the Government's revised expectation of 1.25 per cent. The economists are sticking to the Government's original forecast of 2 per cent.

But most of the economists do not believe the Government will achieve its aim of cutting the jobless rate from 8.4 per cent to 8 per cent by June.

The average forecast is for unemployment to drop to 8.2 per cent.

Wages are expected to grow by 4.1 per cent, which is below the Government's forecast 4.25 per cent.

Inflation is expected to average 1.6 per cent, higher than Canberra's 1 per cent prediction. The latest Consumer Price Index showed in the year to September the cost of living had fallen by 0.3 per cent.

The National Australia Bank's Mr Alan Oster predicts that inflation will rise by 2.75 per cent in the four quarters to June. Citibank's Mr Stephen Koukoulas said inflation would average just 0.6 per cent.

Mr Oster is also the only one to believe short-term interest rates will rise above 6 per cent in the next six months. He says they will rise to 6.6 per cent by the end of the year.

Most economists believe rates will stay between 5 and 6 per cent, although Mr Corby has predicted an official rate of just 4 per cent by year-end.

Mr Stephen Shepherd, from the Victorian Employers' Chamber of Commerce and Industry, is the only one who believes home-loan interest rates of the big banks will rise above 7 per cent by June. He is also alone in forecasting them to be above 8 per cent by December.

Only five of the 27 economists polled believe the dollar will rise above 70 US cents by June while eight believe it will be worth 65 US cents or less. Mr Tim Toohey, of the National Institute of Economic and Industry Research, is the most bearish, expecting 62.5.

The Government believes the current account deficit will rise from $18 billion last year to $23 billion. All the economists agree it will top $20 billion. Mr Toohey said it would rise to $27.3 billion by June and then reach $33 billion by December.

The level of net foreign debt is expected to continue to rise from its present $217 billion. Mr Shields, Bankers Trust's Mr Chris Caton and Mr Hockman believe it will top $240 billion by June, although five economists believe it will decrease.

The Government's mid-term review said this year's Budget bottom line was expected to reveal a $2.75 billion deficit, an improvement on the $3.8 billion predicted at Budget time.

Mr Caton and Merill Lynch's Mr Paul Osborne believe it will be a better-than-expected $1.5 billion deficit. Mr Des Moore, from the Institute of Public Affairs, said it would be closer to $1 billion while J. B. Were & Son's Mr Simon Calder is predicting a balanced Budget.

What the economists say about Asia's slowdown:

Shane Oliver, AMP Investments

"As a result . . . Australian growth in 1998-99 will be around 1.25 per cent lower than otherwise would have been the case. Growth in 1999-2000 will be around 0.75 per cent lower than otherwise."

Bill Evans, Westpac

"The negative effect of the fast emerging recession in East Asia will ... in 1998-99 subtract about one percentage point off growth and pull it down slightly below 3 per cent."

Saul Eslake, ANZ

"The loss of economic growth and employment stemming from weaker exports of goods and services and to a lesser extent heightened import competition (is the biggest threat to Australia's economic future)."

Des Moore, Institute for Private Enterprise

"We could be faced with an extended period of slow growth in East Asia, including Japan. The effects of this on Australian growth will depend on how quickly and how extensively the Government responds with micro-economic reforms, particularly in the labor market and social welfare areas."

Tony Pensabene, Australian Chamber of Manufactures

"The Asian troubles could dampen the export spirit of small to medium manufacturers, making them more cautious in seeking new export opportunities in Asia."

Chris Caton, Bankers Trust

Asian economic troubles will have "very little effect. Long-term growth is determined from supply side considerations".

Asian crisis will stunt Australia's growth

The Asian financial crisis could wipe as much as 1.25 per cent from Australia's economic growth next financial year and add $5 billion to the current account deficit, according to The Age survey of top economists.

However, some economists also believe the economic turbulence and currency instability creates huge opportunities for Australian companies to open and expand business ventures in Asia because our dollar has up to 50 per cent more buying power than it did last year.

The Age half-yearly survey reveals a strong outlook for the domestic economy with inflation and home loan interest rates predicted to stay low, housing and private investment to pick up and the unemployment rate to improve slightly over the course of the year.

But the chief economist with AMP Investments, Mr Shane Oliver, said slower Asian growth could wipe 1.25 per cent from economic growth in 1998-99 and 0.75 per cent in 1999-2000. "The key driver will be substantially lower export growth and a dampening impact on domestic confidence." Westpac's Mr Bill Evans believes growth will be cut by 1 per cent to below 3 per cent and County NatWest's Mr Paul Brennan has also cut 1 per cent from his forecast for 1998-99 and 0.75 per cent for in 1999-2000.

ANZ's Mr Saul Eslake said between 0.75 and 1 per cent could be cut from growth and an extra $5 billion added to the current account deficit.

The Federal Government last month said it expected the economy to grow by 3.75 per cent in 1997-98 but only 3.25 per cent in 1998-99 due to the loss of income from Asia.

Describing the Asian crisis as "the biggest financial meltdown we have ever seen in our lifetime in our region", the Treasurer, Mr Peter Costello, indicated that without it, Australia's economic growth would have moved above 4 per cent, which suggests the Government believes it will reduce growth by about 0.75 per cent.

However, not all economists believe Australia will suffer. Bankers Trust chief economist Dr Chris Caton and the Australian Chamber of Commerce and Industry's Dr Steven Kates both said the impact over the longer term would be minimal.

Mr Peter Summers from the Institute of Applied Economic and Social Research at the University of Melbourne said "Australia's long-run growth rate will be determined more by domestic factors such as balanced budgets and stable economic policies" than the "cyclical phenomenon of the Asian crisis".

Mr Michael Heffernan, from stockbrokers FW Holst & Co, says Australian companies have a unique opportunity to establish and build business in the region because of the higher value of the Australian dollar.

The Australian Chamber of Manufactures' economist, Mr Tony Pensabene, said many smaller firms had built growing export markets in Asia but the recent trouble could "dampen the export spirit . . . making them more cautious in seeking new export opportunities in Asia".