Saturday, July 03, 2010

2010-11 Economic Survey. No double-dip, even Steve Keen says so

The Age half-yearly economic survey:

Tim Colebatch:

AUSTRALIA'S market economists say there will be no double-dip recession here. The Age half-yearly economic survey finds they are expecting a year of something like normal growth, falling unemployment and rising interest rates.

They are also forecasting that the Australian dollar will stay around current levels over coming months, but share prices will rebound to the levels they were at over the summer months.

The survey, taken this week, asked 19 economists from banks, universities, employer groups and other institutions for their forecasts for the new financial year, as well as their opinions on some key issues.

With one exception, the survey found a strong consensus that the economy is heading for growth around long-term average levels. In all, 18 of the 19 economists submitted forecasts ranging from 2.6 per cent to 4.1 per cent, with an average of 3.25 per cent...

The average matches Treasury's forecast for 2010-11, but is somewhat less than the Reserve Bank's more bullish forecast in May of 3.5 per cent.

But the three university economists in our panel are far less optimistic than those in the markets. Monash University economist Jakob Madsen sees Australia falling victim to a double-dip global recession, which will also drag down the US, share values and the world economy in general.

Dr Madsen predicts unemployment will rise over the second half of 2010, and the Reserve Bank will deliver three interest rate cuts to prop up demand.

His traditional partner in pessimism, University of Western Sydney economist Steve Keen, also sees the world heading for a double-dip recession, but with Australia insulated somewhat by Chinese demand and federal stimulus.

Dr Keen, best known for his as yet-unrealised forecast that Australian house prices will fall 40 per cent, is predicting growth to remain stuck in third gear, with GDP growing in the new financial year by 2.7 per cent, despite rising unemployment.

The third academic on the panel, Melbourne University macro-economist Neville Norman, also sees the economy remaining stuck in third, rather than accelerating into fourth, as Treasury and the Reserve are forecasting. And that's a worry, because at this time last year Dr Norman proved the most accurate forecaster on the panel.

Last year he was the bull of the group. This year he is relatively bearish, predicting gross domestic product to grow just 2.6 per cent in the year ahead. He sees global growth stagnating, and inflation rebounding to 3.5 per cent by December pushing up bond yields and forcing the Reserve to throw in another three rate rises on to a sluggish economy.

The optimist of the group is Richard Gibbs, chief economist of Macquarie Group. He also sees bond yields rising, but along with interest rates, stock prices, and the dollar but driven by a rapid acceleration of growth rather than inflation.

Mr Gibbs predicts the economy will grow by 4.1 per cent over 2010-11, roughly double its growth rate in 2009-10. The world economy would also shrug off the double-dip fears and the debt crisis to chalk up 4.3 per cent growth over 2010.

But in his scenario, too, the Reserve responds by pushing interest rates up another two notches by Christmas. Indeed, while the financial markets are now punting on no interest rate rises before 2012, the market economists are unanimous in predicting that rates will rise before Christmas and the only division is on whether there will be just one rise or two.

One good reason why is that they expect inflation to inch back up, to the edge of the Reserve Bank's target range or beyond.

Of the 18 who forecast inflation over 2010, 14 predict the number will have a 3 in front of it.

Similarly, all the market economists predict a strong rebound in the sharemarket, on average to just under 5000 points on the S&P/ASX 200 Index by the end of the year. University and industry economists are more wary, though all but Dr Keen and Dr Madsen expect stocks to rise.

Virtually all our panel expect bond yields to rise from their present lows, with most tipping them to end the year somewhere in the high 5s.

There is also a general consensus that the dollar will rise from current levels, as markets shake off their fear of a double-dip slump.

Half the panel predicts the dollar will be at least US90 by the end of the year, although no one is bold enough to predict it will reach parity.

Only the three university economists see unemployment rising significantly. Five think it will remain around current levels, while the rest see it ebbing down to about 5 per cent or less by the end of the year.

Several also expect the federal budget to come in a bit better than Treasury has forecast a pretty safe bet, since the forecasts are designed to be beaten, unless there is a recession.

Former Treasury number cruncher Alan Oster, now chief economist at NAB, predicts it will come in at $35 billion, as against the Treasury forecast of $41 billion.

In The Age

Boom for miners but torture for others, long price boom on way

THE tax on mining comes at the right time. Australia's market economists believe we are facing a boom in commodity prices that could last a decade or more and put pressure on other sectors by keeping the dollar high.

The Age survey, taken this week, finds most of Australia's financial houses expect the commodity price boom to become entrenched and continue long into the future.

Most also expect that the long boom for miners will be a long torture for other trade-exposed sectors such as manufacturing, agriculture, tourism and even education. But most also argue against government intervention to help them.

The panel of 19 economists was asked if it shared the view of Treasury and the Reserve Bank that Australia's mineral prices will remain high for decades, and, if so, what will that mean for the long-term level of the Australian dollar, and for other trade-exposed industries such as manufacturing, agriculture and tourism.

A clear majority broadly agreed that commodity prices have entered a long boom. They might come off their peaks, but global supply of iron ore and coal is thought unlikely to grow fast enough to close the gap with demand, driven by the industrialisation of China and India.

Commonwealth Bank's Michael Workman said conditions before the global financial crisis were ideal for mining investment, but even then, there was far too little of it to close the gap. And, he warned, "the next 10 years are likely to be a period of constrained global liquidity, which will be adverse for debt-based mining exploration and development".

ANZ chief economist Warren Hogan said commodity price cycles typically last for 30 or 40 years, and this one has just begun. "We do not expect commodity price levels to revert to the 'bear market' levels seen in the 1980s and '90s for at least another 10 to 20 years," he said.

But some disagreed. Richard Gibbs of Macquarie Bank pointed to the scale of Chinese investment in the mining sectors of Africa and Latin America.

"Ultimately, this will provide the scope for the introduction of competing supply of key minerals", he said.

NAB chief economist Alan Oster and BIS Shrapnel's Richard Robinson also warned that future technological breakthroughs in prices of solar energy and other renewable fuels could sharply reduce the value of Australia's coal and gas.

But what would this mean for the dollar? The consensus was that it will remain high, relative to the past, when over the two decades to 2005 it averaged US70. Only two forecasters put a number on it. CBA estimates it will average US80 over the next decade. Westpac's Bill Evans is more bullish, saying the combination of high commodity rises and Australia's interest rate differential will keep it around an average of US90.

What will that mean for manufacturing and other trade-exposed sectors? "Hollowing out," said Mr Robinson of BIS Shrapnel. "Large tradeable parts of manufacturing will become uncompetitive. Tourism and agriculture will also suffer."

And add higher education to that, warned Monash University's Jakob Madsen: "It is starting to look cheaper to take an education in the UK than in Australia." But while there was a strong consensus that other trade-exposed sectors would suffer if the dollar stays high for decades, few supported government intervention to offset it.

"This is the way resources get diverted to our most successful sector, to take advantage of the commodity price boom," wrote BT's Chris Caton.

Australian Industry Group chief executive Heather Ridout warned the high dollar will create "a major challenge" for business and government. She urged accelerated economic reforms.

Norman conquest of the market soothsayers

THE year 2009-10 was better than anyone expected. Well, almost anyone. While gloom still dominated the scene at this time last year, some in our panel told us then that we were in for some pleasant surprises.

Our forecasters saw some of it, but not all. They told us China would prove stronger than the global financial crisis. They saw the global recession was almost over, and growth would return.

They told us the sharemarket would pick up, on average tipping the S&P/ASX 200 to close the financial year at 4364 points (almost right - it was 4301.5).

But they didn't see how strong the rebound would be. No one came within cooee of guessing that unemployment last month would be 5.2 per cent (the average tip was 7.9 per cent). Only a few saw the Reserve Bank raising rates rapidly to slow demand.

Melbourne University's ebullient macro-economist Neville Norman naturally led the bulls. This time last year, Dr Norman forecast GDP growth of 2.5 per cent over the new financial year and predicted China would grow by almost 9 per cent; but warned inflation would remain high, and the Reserve Bank would throw in three interest rate rises before Christmas. There's a well-informed man.

Tim Toohey's team at Goldman Sachs also foresaw China booming, GDP growing 2.2 per cent, and the Reserve's four rate rises by mid-2010. BT's Chris Caton picked both the Australian and the US turnaround.

In a sense, the defining fact of 2009-10 was the stimulus-driven boom in China, and its impact on Australia's terms of trade, dollar and sharemarket. Most of our panel expected China to keep up a solid pace of growth, but Professor Norman and Macquarie's Richard Gibbs were the only ones to pick just how strong it would be.

Damien Boey of Credit Suisse was almost spot on in tipping the dollar to rebound to US85¢ by mid-2010, while NAB's Alan Oster and Telstra's Geoffrey Sims were also very close. Mr Sims came closest to tipping where local stocks would end up, while HSBC's Tony Cripps was right in undershooting the consensus to tip bond rates at just 5.10 per cent.

But the Palme d'Or for our forecaster of the year goes to Dr Norman - not only for getting so many important tips right, but also for making macro-economics so entertaining for the generations of Age readers who have been his students.

Disclosure: Tim Colebatch also studied macro-economics under Professor Norman.

In The Age

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