Saturday, July 04, 2009

2009-10 Economic Survey. Australia set to defy the world and avoid recession

So far, we're beating the odds





Australia is on track to defy the world and avoid a recession in 2009, beginning a recovery early next year in the assessment of more than 20 leading economists.

The Age's half-yearly economic survey predicts an economic contraction of a mere 0.1 per cent this year followed by a rebound of 0.6 per cent in the year to June 2010.

The forecast allows Australia to avoid the two consecutive quarters of negative growth commonly taken to define a recession, although it allows for that possibility if the recession is mild.

It coincides with news that tax breaks and the end of the financial year pushed sales of cars, buses, trucks and utes toward an all-time high in June with sales exceeding 100,000 in June for only the forth time...

"The surge is directly attributable to the Budget tax break," said Federal Chamber of Automotive Industries chief Andrew McKellar. The budget measure allows small businesses to write off 50 per cent of the cost of vehicles bought by December.

"Business purchases are up 12 per cent on a year ago, and business purchases of utes, vans and light trucks are up 27 per cent," he said. "As a result of the Budget we've probably sold an extra 10,000 over three months."

The vehicle sales boom follows news this week of record retail sales and a recovery in property prices.

Macquarie Group economist Richard Gibbs said there was now little doubt that the combined impact of the stimulus measures and lower interest rates had "been more effective in boosting spending and confidence than even the optimists had hoped."

"Of course, the pessimists argue that unemployment is only now about to go through the roof, and once it does it will inevitably bring the economy crashing down. But the whole point of the stimulus was to support spending so that firms didn't have to slash payrolls," he added.

The Macquarie Group was among the most optimistic of the economists pooled in The Age survey, exceeded only by Melbourne University economist Neville Norman who expects the economy to grow 1.2 per cent this year followed by 2.5 per cent in the year to next June.

At the other end of the scale University of Western Sydney economist Steve Keen expects the economy to contract 3 per cent this year and then contract a record 6 per cent in the year to June.

Associate Professor Keen has the distinction of having produced the most accurate forecast in the Age's previous half-yearly survey published in January.

In another encouraging sign the Olivier Job Index due for release tomorrow (SUN) shows a leveling off in the rate at which job vacancies are disappearing.

"It's too early to tell whether it's a trend," said Olivier group director Robert Olivier. "But on this evidence, the rate of decline is certainly decreasing and the recruitment market is stabilising."

The separately-released Australian Industry Group/Commonwealth Bank Performance of Services Index moved into positive territory for the first time in 14 months.

Putting the June result into perspective, Commonwealth Bank chief economist Michael Blythe said it merely showed that the service sector had "stopped contracting".

It is yet to move decisively into expansion territory," he said.

The economists surveyed by The Age expect the unemployment rate to climb from 5.7 per cent to 7 per cent by December, a more mild acceleration than forecast in the Budget. The Bureau of Statistics will update the official unemployment rate on Thursday.

In The Age

We've bought success, but for how long?

Without the Rudd government's multi-billion dollar stimulus packages, and without the record government debt that will accompany them, we would be in free-fall.

That stark assessment, delivered repeatedly in economists responses to The Age half-yearly survey, accords with almost every piece of economic data released this year.

And it raises an unanswerable question - what's going to happen when the bulk of the stimulus programs run their course end of the year?

June was the biggest month for truck and car sales to Australian businesses - ever. And it was the third-biggest for vehicle sales of all types ever. It's the result of a Budget measure that as-good-as pays small businesses to buy vehicles, offering them a 50 per cent tax deduction if they sign up before the end of the year.

But what then?

Building approvals and house prices have been back on a rising trend since the start of the year, buoyed by a First Home Owners Boost that's set to phase out from September.

Retail spending has been simply extraordinary, as has been employment in the retail sector. In each of the last six months more has been spent in Australian shops than was ever spent before.

But it's came at an unprecedented cost. The government handed us stimulus cheques worth $8.7 billion in December, then cheques worth $4 billion in March and $7 billion in April. It has paid for the retail boom itself. But what'll happen when the payments stop?

The Treasury believes it'll take about six months after the final stimulus payment for spending to wind down, meaning that towards the end of the year as other stimulus measures wind up things could be looking pretty weak.

None of this takes away from the enormity of what Wayne Swan, Kevin Rudd and the Treasury with the help of the Reserve Bank has achieved. They've managed to get Australia to hold itself up and a time when the rest of the world has been offering scant support.

For now the panel are grateful, and hopeful.

"Global events and the need for the government to respond to support demand and growth have made a large budget deficit inevitable," says the Business Council of Australia. "But it is now critical that we justify every dollar we spend."

''With private demand contracting as business investment moves lower, public demand has to help fill the gap," says Westpac's Bill Evans. ''We've benefited from considerable momentum going into this crisis as well as significiant monetary and fiscal policy flexibility.''

''I have no problem with the government's cash splashes. It's now a matter of waiting for the world economy to stabilise, and there are clear signs that is already happening, says BT Financial's Chris Caton.

These assessments and the economic data to date support the government's actions and sideline the Coalition's criticisms.

But the government will be loathe to pull out its checkbook again, in part because that would seriously run up debt, and in part because the Coalition's repeated criticisms of debt for handouts are gaining traction.

Labor lost its lead as the party best-equipped to handle the economy in the most recent Essential Media poll and was outmatched by the Coalition two to one on the question of which side of politics was the best-equipped to handle debt.

One of its hopes is that its infrastructure spending builds a sustainable domestic recovery by year's end. Small business Minister Craig Emerson said yesterday he hoped to have 35,000 consutruction sites operating by the end of the year, generating employment, confidence and continuing spending all by itself. Asked whether it would be enough he said he didn't have a crystal ball.

It's other hope is that a global recovery gets underway before year's end. The Organisation for Economic Cooperation and Development believes it will, forecasting developed country growth of 1.5 per cent next year. "Activity now looks to be approaching its nadir," said its cheif economist last month. The IMF will reveal its view next week.

China's economy is recovering, and importantly for Australia its demand for our raw materials has jumped to a record high. In the most recent three months - global recession notwithstanding - we've sold more to China than ever before. There's debate about whether its happening because China is stockpiling resources or because it is actually using them, but significantly the Reserve Bank has come down on the side of genuine demand.

There has been "a genuine pickup in economic activity in China - quite a significant one" Governor Glenn Stevens told a business audience in May. "The pickup is real".

Most of The Age panel seem to agree. They're forecasting positive global growth next year, and positive economic growth in Australia.

If they are right we will have escaped the worldwide recession, almost alone among our peers. It'll be the result of both good management and good luck.

In The Age

For predicting the slump, just a few get medals

IF ONLY these crystal balls always worked. A year ago, our panel thought Australia would muddle through the 2008-09 financial year without too much damage.

Growth would slow a bit, they warned. Unemployment would rise a bit. But the team saw the sharemarket rebounding strongly from the falls of 2007-08, with the S&P/ASX 200 index nudging 6000. The world economy would keep growing. There was no crisis ahead.

Only one forecaster last June did foresee the full extent of what lay ahead — indeed, he saw more ahead than we actually got. That was Steve Keen, of the University of Western Sydney, who for years has warned that Australia's reliance on debt to drive growth would one day bring it down.

Professor Keen told us that growth in 2008-09 would shrink to zero. He forecast that unemployment would rise to 6 per cent, that the sharemarket would fall further, the budget would fall into deficit, and the Reserve Bank would be forced to cut interest rates significantly. By and large, all that has come true.

He was not alone in warning that 2008-09 would be worse than Treasury, the International Monetary Fund and the OECD were then forecasting. (Last July the IMF even declared: "In our view, the balance of risks to growth is tilted toward the upside"; it warned the Reserve Bank to be ready to raise interest rates. No medals for that forecast.)

Stephen Roberts is now with Nomura Securities but was then working for some dudes called Lehman Brothers; perhaps it's not surprising that he saw serious trouble ahead. So did Jakob Madsen at Monash University, Saul Eslake at the ANZ bank, and Heather Ridout and her team at the Australian Industry Group. But none of them saw a slump of this magnitude.

No one a year ago predicted a world recession, not even Keen, who thought it would be confined to chronic debtor countries such as the US and Australia. No one thought the sharemarket would dive to less than half its former value before a minor rebound. Keen was the only forecaster who thought it would fall, but only to about 5000 now. We'll give him a silver medal for that.

No one thought interest rates would dive as low as they have. Keen, Peter Osborne of Merrill Lynch, and the Australian Industry Group team under Ridout all saw big falls in some rates. But the only tip worth gold was Osborne's forecast for the 10-year bond rate to be 5.75 per cent right now.

Roberts deserves a gold medal for tipping the Aussie dollar to be worth US78¢ at this point, and 76 yen. Pity that Lehman Bros is no longer around to pay him the bonus he deserves, because he also won gold for tipping that consumer spending would grow 1 per cent, while housing investment would fall marginally.

The NAB's John Sharma and Peter Jones of Master Builders win gold for tipping the dollar to now be 64 and 65 respectively on the trade-weighted index — well below its value at the time of the tips.

Madsen was the only forecaster to tip the extent of the plunge in the current account deficit, and with Keen, the only one to tip that unemployment would soar to 6 per cent.

Overall, Madsen wins the bronze medal for 2008-09. Roberts takes silver, but the Palme d'Or for the forecaster of the year clearly belongs to Keen.

The bad news is that Keen thinks 2009-10 will be much worse. He says Australia and the world are in the early stages of another Great Depression. The global boom of the past decade was financed largely by increasing leverage; we now face a decade or so of deleveraging.

"We still have massive private debt that has been run up over the past 40 years," Keen says. "The ratio of private debt to GDP now is 1.7 times what it was at the start of the Great Depression. The deleveraging of that debt will swamp anything the Government tries to do in stimulus."

Keen predicts that GDP will slump by 6 per cent in 2009-10, that unemployment will double to 12 per cent, the S&P/ASX 200 will shrink by a third to 2500 — and the Reserve Bank will end up cutting cash rates to 0.5 per cent. Others disagree.

I don't want to be accused of bias, but I hope we won't be handing Keen the Palme d'Or again next year.

In The Age