Saturday, January 02, 2010

2010 Economic Survey. Happy New Year: prepare for normal growth


THE Reserve Bank is forecasting a more or less normal year for Australia. Treasury is more wary, but positive. And our panel, for the most part, is somewhere between the two.

We have a couple of dissenters with a much more pessimistic view, and perhaps a couple who see things hotting up more quickly. But most of our panel sees Australia's recovery continuing this year in third gear, then moving up into fourth.

The panel generally sees the nation's output or GDP growing by between 2.5 and 3.3 per cent during 2010. Treasury's view appears to be a bit above the bottom of that range, while the Reserve is at the top of it.

The median forecast in our group is 1.9 per cent, which suggests that there is consensus among market economists that the Reserve's prediction of 3.25 per cent growth is a bit optimistic.

The panel sees interest rates rising through the year, but more gradually than last year, and by slightly less than the markets have priced in...

The panel's median forecast is for four rate rises during the year, two in each half, lifting the cash rate to 4.75 per cent by December.

In the panel's view, Australia would be rising along with a modest resurgence in the world economy. The median forecast is for global growth of 3.15 per cent this year, roughly matching the International Monetary Fund's October forecast. The median tips include a surprisingly strong 2.28 per cent growth in the United States and 9.33 per cent growth in China.

Equity markets are forecast to keep drifting up, both here and overseas, with the Australian dollar likewise drifting slightly higher. But most see growth as too low to reduce unemployment, which is expected to remain at about 6 per cent throughout 2010.

I have used median forecasts here because the average forecasts are dragged down by our two dissidents: the University of Western Sydney's Steve Keen, and Monash University's Jakob Madsen. Both see the world entering a double-dip recession this year, dragging Australia back down with it.

At the other end, two panel members see activity heating up faster this year than the authorities anticipate, partly driven by rapid recovery in the US. Macquarie Bank's Richard Gibbs sees this lifting export prices by 10 per cent and raising 2010 growth to 3.75 per cent.

From Melbourne University, Neville Norman - the only panel member six months ago to tip three interest rate rises by Christmas - sees the increased heat spilling into rising inflation, sharply higher bond rates, and much higher interest rates for Australians, with the RBA lifting the cash rate from 3.75 per cent now to 5.5 per cent by Christmas.

Perhaps the last word should go to the forecaster we should have followed at this time last year: BT's chief economist and resident wit, Chris Caton.

Dr Caton punted correctly a year ago that the recession would be short and shallow, and followed by a strong rebound in market confidence. He picked the stockmarket levels here and overseas with impressive foresight, tipped that the dollar would rise and the budget deficit blow out, and foresaw two of the Reserve Bank's three interest rate rises.

For 2010, Dr Caton is in the consensus, but at the optimistic end, predicting more or less normal growth for Australia and the world.

A close watcher of the US economy, his stand-out tip is a 3 per cent US growth rate this year. That would help solve many people's problems if it came true.



Build homes the agreed path: TIM COLEBATCH

Carbon pricing is 'starting point': MATHEW MURPHY

Some countries 'too big to fail', say economists: LUCY BATTERSBY

Developing nations expected to leap forward: MALCOLM MAIDEN

Published in today's Age

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