Monday, January 04, 1999

1999 Economic Survey. Continued growth tipped

Phillip Hudson:

The Australian economy will avoid recession this year and continue on its path of high growth and low inflation despite the worst effects of the Asian financial crisis reaching our shores, according to The Age half-year economic survey.

However, the unemployment rate will remain stuck above 8 per cent and the current account deficit is set to become a hot political issue.

The survey of 33 economists from business, academia and the financial sector predicts economic growth will average 3.4 per cent in 1998-99, slightly better than the pre-Christmas Budget update from the Treasurer, Mr Peter Costello, which revised the Treasury forecast from 2.75 to 3.25 per cent.

But looking ahead to 1999-2000, the panel believes growth will drop back to just under 2.6 per cent.

The majority of those surveyed said the chance of a recession in Australia in 1999 was less than 20 per cent.

The optimist in the survey is Mr Peter Summers, from the Melbourne Institute of Applied Economic and Social Research, who predicts growth of 4.3 per cent this financial year due to strong consumption, business investment and real share prices.

The pessimist is Professor Neville Norman, from the University of Melbourne, who says growth will be 2.5 per cent, based on a "fairly sombre view about private business investment" due to last year's gloom about Asia and a trade blow-out due to poor

commodity prices, aggressive import competition and some weakness in sales to Japan.

Professor Norman said growth of 2.5 per cent in the ninth year of an economic expansion was a strong result. He almost takes the prize as optimist for 1999-2000 with his prediction against the trend that growth will soar by 3.8 per cent.

That forecast - bettered only by Mr Richard Robinson, from BIS Shrapnel - is based on the improving mood about business investment next year, some pick-up in commodity prices, and economic recovery in the Philippines and Malaysia.

The 1999-2000 pessimist is Mr David Corby, from National Mutual Funds Management, who believes the worst effects of the Asian economic crisis will crunch growth to 1.3 per cent.

The international outlook is for a further slowdown in the United States and a continued malaise in Japan.

On the employment front, Mr Geoff Bills, of the Housing Industry Association, and Mr Des Moore, from the Institute of Private Enterprise, predict a gloomy 9 per cent jobless rate for next Christmas but Mr Phillip Adams, from Monash University's Centre

of Policy Studies, is punting on 7.2 per cent. The majority said the jobless rate would stay at 8.2 per cent.

For those with a job, average earnings are predicted to rise by 3.75 per cent, well ahead of price increases of 2.24 per cent. All the economists believe inflation will stay below the Reserve Bank's 3per cent "comfort zone".

Professor Norman is warning home buyers that the standard variable home loan interest rate could be above 7 per cent by Christmas but he said interest rates would "still not be back to where they were three years ago".

The dollar, which ended 1998 at 61.45 US cents after its record low of 55.30 last August, will have another rocky year, according to the panel, which values it between 57 and 70 cents by next Christmas.

The Asian economic crisis will continue to bite into exports (despite efforts to find new markets) and strong domestic demand will increase the appetite for imports. This will feed into a rising current account deficit - nominated by some as the key domestic issue to watch in 1999 - which is expected to rise to $32 billion.

Downturn on Wall Street big risk ahead

The overvalued United States sharemarket poses the greatest risk for investors in the year ahead, and any severe correction could drag down the Australian economy, according to The Age economic survey.

While the most pressing domestic concerns are the rising current account deficit, a rapid change in the value of the dollar, and the implementation of the goods and services tax, almost half the economists surveyed nominated Wall Street as the big risk in 1999.

Mr Rob Henderson, from Dresdner, said Wall Street was "overvalued on practically all measures used by equity analysts". Using historical data by the Australian National University academic Professor Adrian Pagan - who is a member of the Reserve Bank board - Mr Henderson said the chances of the US bull market continuing "are getting very low".

The Westpac analyst Mr Bill Evans noted concern about "irrational exuberance" in the US stockmarket while many others simply said 1999 would be the crunch year when the bubble would burst and the US economy would slow.

The other flashpoints to watch, according to the experts, include economic troubles in Brazil and Russia, the continuing sluggish performance of Japan, how the troubled South-East Asian economies perform, and whether China is dragged into the financial crisis.

The wildcard for 1999 comes from Mr Craig James, from Colonial State Bank, who suggested plunging oil prices could spell the end of the Organisation of Petroleum Exporting Countries.

"If oil prices fall further, then the contagion spreads to the Middle East with pressure for devaluations, the collapse of OPEC could be the X factor for 1999," he said.

The primary domestic concern is not a slowing of economic growth but what happens if growth remains strong.

Mr Saul Eslake, from ANZ, summed it up: "If the Australian economy does not slow, as almost universally expected, it will raise renewed concerns regarding the current account deficit and inflation, with the possibility that interest rates rise rather than fall."

Telstra's corporate economist Mr Geoffrey Sims said a "rapidly" rising current account deficit would constrain the Reserve Bank in further cuts to interest rates.

The 33 experts were asked their view on the risk of a recession in Australia in 1999.

Many said while there would be a recession at some stage, there was less than a 20 per cent chance of it being in 1999.

The Melbourne Institute's Mr Peter Summers used historical data to calculate that the possibility of a recession by the end of 1999 was 33.8 per cent.

The Victorian Employers' Chamber of Commerce and Industry's Mr Steven Shepherd was one of the few to mention the GST, saying business must focus on how tax change would affect investment strategies.

At the Australian Chamber of Commerce and Industry, Mr Stephen Kates warned an ACTU wage claim of up to 7 per cent "would cause deep problems within Australian industry".

The Australian Industry Group's Ms Heather Ridout said while the threat of a recession in 1999 "seems ridiculous, post 2000 might be another story".