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".