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.