Wednesday, January 05, 2000

2000 Economic Survey. Full speed ahead in 2000

Phillip Hudson:

Although interest rates could rise by up to one percentage point, the economy will continue to boom and the unemployment rate could be as low as 6 per cent by next Christmas, according to The Age half-year economic survey.

The new year is also tipped to see the sharemarket reach new highs and the dollar pick up ground, but Australia still faces another tough year on the trade front.

The survey of 30 economists from business, academia and the finance sector predicts economic growth will average 3.9 per cent in 1999-2000 — above the Government's November Budget update of 3.5 per cent.

It is also much stronger than the 3.4 per cent rate of growth forecast by The Age panel in the previous survey, published six months ago, and substantially stronger than the 2.6 per cent average forecast this time last year by the group. It reflects a substantial change in sentiment about the Australian economy, which has prospered despite the Asian financial crisis.

Looking ahead to 2000-01. the panel believes growth will slip to 3.65 per cent — slightly lower than the forecast made by the Treasury of 3.75 per cent.

One of the optimists is Mr Bruce Hockman, from Deutsche Bank, who predicts growth will be 4.2 per cent for 1999-2000 and a huge 4.8 per cent for 2000-01.

Mr Hockman is one of the 11 economists to predict the official interest rate will rise from 5 per cent to more than 6 per cent. However, he does not believe this will he enough to slow the economy.

He says private consumption will remain strong and that the $6 billion being spent from the Budget surplus to help pay for the GST tax cuts will boost already strong growth.

Mr Tooby Johnston, from AXA Australia, is also bullish about the economic outlook. He is among four experts predicting growth of 4.5 per cent for 1999-2000 — a full percentage point higher than the Government. Mr Johnston says domestic demand "looks pretty good to us" and it will be complemented by stronger international growth.

The pessimist is Professor Neville Norman, of the University of Melbourne, who predicts growth of 3.2 per cent this financial year and just 1.8 per cent next year. Professor Norman says he had a "sombre view", especially about the risk of a downturn in the United States. He believes "somebody ought to be alerting the business community of this risk".

The panel predicts employment will grow by 2.3 per cent and the unemployment rate, which fell to a decade-low 6.7 per cent last November, will average 6.5 per cent by next Christmas.

Mr Hockman and Mr John Edwards, from HSBC, predict it will be as low as 6 per cent, while Mr Bill Evans, from Westpac, and Mr Philip
Adams, of Monash University's Centre of Policy Studies, forecast 6.1 per cent. Only Mr Geoffrey Sims, from Telstra, believes the jobless rate will be back above 7 per cent.

For those with a job, the average wage is tipped to rise by 3.9 per cent, but the cost of living may increase by more than 5 per cent. The outlook for inflation is distorted by the introduction of the 10 per cent GST on 1 July.

The panel believes the GST will cause prices to leap by 3 per cent in the September quarter. The full-year effect of the GST will be a 2.6 per cent lift — slightly lower than the Government's estimate of 2.75 per cent.

The biggest risk to interest rates is perceived to be the threat of a wages breakout by workets chasing extra GST compensation, although some economists say an already strong economy could be overheated by the $8 billion being taken out of the Midget to help pay for tax cuts.

For the first time, the panel was asked to predict the Reserve Bank's official cash rate. Dr Steven Kates, from the Australian Chamber of Commerce and Industry. and Ms Heather Ridout, from the Australian Industry Group, believe it will stay unchanged at 5 per cent throughout the year. Mr Hockman, Mr Johnston and Mr Mark Rider, from Warburg Dillon Read, predict it will be at 6 per cent by June.

Ms Ridout said there was no need for an interest-rate rise since the economy was enjoying "Goldilocks growth — not too hot and not too cold. it's good for job growth with no inflation pressures."

In the next six months. 18 economists expect a 0.5 per cent rate rise and nine economists expect that, by December. rates will be at 6 per cent. Professor Norman and Mr Richard Robinson. from BIS Shrapnel, believe they will reach 6.5 per cent. Many economists said one of the key risks for investors in the year ahead was the possibility that the Wail Street bubble would be pricked.

However, the panel said the All Ordinaries Index, which ended last year at 3152.5 points, was expected to break records and be 3238 at the end of this year. The dollar, which ended last year at 65.33 US cents, is forecast by the panel to rise to about 69 US cents over the year.

The trade outlook will continue to be tough. despite a brighter position for international growth and demand for Australia's exports. The current account deficit is expected to be $33 billion for the calendar year. The net foreign debt is tipped to rise marginally from $239 billion in the September quarter last year to $242 billion by year's end.

GST hit will be a one-off: analysts

The introduction of the GST will only threaten low inflation and put upward pressure on interest rates if workers chase pay rises as added compensation for the tax changes, according to economists surveyed by The Age.

In fact, the greatest pressure on rates flowing from the tax revolution will be the $12 billion tax cuts, with $6 billion being spent from the Budget surplus to sweeten the tax package.

Economists surveyed by The Age generally agreed with the Reserve Bank's view that the GST would have a one-off impact on the cost of living.

The panel believes the rise in the cost of living will average 5.4 per cent in the year to December. The Age also asked the panel to predict the exact impact of the GST on the September quarter Consumer Price Index and on inflation in the year to June 2001.

The average forecast was that prices would leap by 3 per cent in the September quarter due to the GST and the one-off rise in prices would be 2.6 per cent for the first year.

This average is slightly lower than the Government's prediction that the GST would add 2.75 percentage points to the CPI in the first year.

Aside from the tax cuts, the Government will increase social security and family payments, but some unions have suggested they will seek higher wages to compensate for the GST.

ANZ's chief economist, Mr Saul Eslake, expects a 3.5 per cent jump in prices in the September quarter after the introduction of the GST. He said that as the benefits of the removal of other taxes flowed through, the impact on prices in the year to June 2001 would be 2.25 per cent.

"The GST's impact on the CPI is one-off," Mr Eslake said. "There will be lasting effects only if wage claims also increase by way of completely unjustified compensation for this one-off impact, or if businesses increase profit margins, the ACCC notwithstanding."

Dr Steven Kates, from the Australian Chamber of Commerce and Industry, said employers wanted the Government to carefully manage the issue because any rate rise would have no immediate impact on prices "but would have harmful longer-term consequences for growth and employment".

"It must be clearly articulated by the Government that there are compensating tax cuts taking place, which more than repay the cost of the goods and services tax," he said.

Ms Heather Ridout, from the Australian Industry Group, said rates would rise if workers sought to "double dip" by getting GST compensation from the Government and their employer.

"Low interest rates and rising employment opportunities are much more valuable than an illusory wage increase," she said.

St George Bank's Mr Tim Crawford said he did not believe the GST would affect interest rates, but the tax cuts might. "The tax cuts associated with the GST will add impetus to economic growth and add to the case for modest monetary policy tightening," he said.

AMP's Mr Shane Oliver shared that view, saying: "The interest rate impact relates more to the tax cuts and the net fiscal easing. This is probably worth 25 to 50 basis points of monetary tightening. If we see wages rising, then the GST effect could add another 25 basis points or so to cash rates."

Economists also said traditional measures of inflation would be distorted by the GST and Mr Steven Wojtkiw, from the Victorian Employers' Chamber of Commerce and Industry, said it was crucial for business to make sure prices and contracts linked to the CPI were not based on the GST-inclusive rate.