Friday, December 31, 2010

2011 Economic Survey. Before the flood: how 2011 was shaping up

Enjoy the year ahead. Economic forecasters think it'll be little different to the one we have just had.

Australia's unemployment rate, at present 5.2 per cent, will slip a fraction to 4.95 per cent. Economic growth, most recently 3.3 and 2.7 per cent, should be 3.1 per cent by year's end. Inflation, at present 2.8 per cent, should be 2.9 per cent.

As good as they are, the results of the Age half-yearly economic survey will disappoint Australia's decision makers. Treasury and Reserve Bank are predicting higher economic growth (the Reserve punting for 3.75 per cent) and lower unemployment, with Treasury expecting a slide to 4.75 per cent by June, and a further slide to to 4.5 per cent 12 months later.

Only one of the Age forecasting panel is consistently as optimistic as the official family, and he used to be part of it. Paul Bloxham left the Reserve to join HSBC in September and he is the most optimistic of the lot, expecting economic growth of 4.2 per cent this year pushing the unemployment rate down to 4.5 per cent.

At the other end of the scale Monash University's Jakob Madsen of Melbourne University is alone in expecting recessionary growth of just 0.7 per cent through the year, something that derives from his forecast of zero economic growth in the United States and just 2 per cent worldwide... He has even managed to outdo the usually pessimistic Steve Keen who this year sees no recession in Australia and none worldwide.

That the somewhat less-optimistic consensus results in a higher inflation rate than the official forecasts suggests the panel really don't believe the inflation forecasts. The Reserve Bank says it will be contained at 2.75 per cent. Our panel expects 2.9 per cent, with half expecting 3 per cent or more.

They also distrust the Budget forecasts. Treasury expects a deficit of $41.5 billion this financial year, $12.3 billion the next and a surplus thereafter. Less optimistic about growth they may be but our panel expects more of it to flow to the government, pushing the deficit down to $35.3 billion this year and $11.7 billion in 2011-12, with some low forecasts for 2011-12 suggesting that with luck and some squeezing of spending the government could get a surplus in 2011-12 which the Treasurer could announce in May this year. Or maybe not. Some of the deficit forecasts remain hefty.

The panel is certainly of the view export prices won't climb much further, predicting a gentle of decline in Australia's historically high terms of trade. Like Treasury they expect Australia's current account balance to worsen as we import more equipment to take advantage of the mining boom even as prices plateau.

It'll necessitate only two relatively gentle taps on the brake from the Reserve Bank in the view of the panel, one in the first half of the year and one in the second, lifting the cash rate from 4.75 to around 5.25 per cent. Some expect worse. Paul Bloxham formally of the Reserve expects three and expatriate Australian Annette Beacher from her base at TD Securities in Singapore expects four.

None of it will be too bad for business in the benign picture painted by our panel. The Australian share market should climb a further 8 per cent outpacing Japan's 6 per cent, the United States' 4 per cent and the United Kingdom's anemic 1 per cent.

Published in the The Age, December 31

So how did they do?

A year ago no-one expected the unemployment rate to fall to 5.2 per cent, no-one even came close. Except for Annette Beacher of TD Securities who is actually outside of the country in Singapore. She was spot-on, predicting 5.2 per cent by December at a time when the official rate was in the upper fives.

What is seems curious now knowing how things turned out is that most of our panel expected unemployment to grow. Heather Ridout of the Australian Industry Group expected 6.25 per cent by now, Warren Hogan of the ANZ expected 6, a bearish Steve Keen went for 8. They were in exceptionally good company. Treasury itself predicted a jump to 6.5 in its mid-year Budget update. Earlier in the Budget proper it expected a jump to north of 8.

These days unemployment is thought to be a truer measure of how the economy is going than the quarterly Gross Domestic Product.

Not only are the GDP figures infrequent and late (we will find out about the December quarter in February) but the headline figure bounces around so much as to have little reliable meaning. Our panel's average forecast of 2.64 per cent for the year to December may turn out to be right, or not. And in any event it wouldn't tell us much about whether they had been right in guessing how the Australian economy had been travelling. Excluding the two forecasters who were clearly wrong (Jakob Madsen went for 1 per cent through the year and Steve Keen went for 0.5 per cent) the average was 2.85. That's likely to be a touch below what we'll end up with, for what its worth.

Our panel was spot on when it came to rates, on average picking a Christmas cash rate of 4.73 per cent. Several picked exactly 4.75, among them the economic chiefs of the ANZ, NAB, AMP and Merrill Lynch. Some went uncomfortably high going for 5.5 per cent by Christmas including Annette Beacher and Chris Caton. Beacher is sticking to her guns going for 5.75 per cent this coming Christmas. Caton has changed his tune and is back with the pack punting for 5.25.

On exchange rates few picked the $US1 dollar, but three who did were Beacher, Alan Oster of NAB and Shane Oliver of the AMP who was bold enough to go for $US1.02.

None of them picked the massive improvement in Australia's terms of trade.

You had to be bold to be right if you were forecasting 2010. The worry about this latest lot of forecasts is that few of our panel have been. If the unexpected happens (and it often does) they might all be wrong together.

Published in the The Age, December 31

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The July 2010 Age Economic Survey

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