Saturday, July 02, 2011

2011-12 Economic Survey. A year of normal growth?

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Tim Colebatch:

AUSTRALIA'S private sector economists are less confident about the new financial year than their official counterparts, but nonetheless expect it to be a year of solid growth for Australia and the world.

At the end of a financial year that delivered rather less than they had expected, the panel of 19 economists in The Age half-yearly economic survey, by and large, predict growth to accelerate over the next 12 months, the sharemarket to rebound, commodity prices to peak and edge down, unemployment to fall, and interest rates to rise.

Given the risks hanging over the global economy partisan conflict in the US Congress making the nation ungovernable, government debts in Europe threatening to unravel the euro zone, China struggling to control its economy for a soft landing that would make 2011-12 a very good year for business, workers and investors in Australia.

Our panel of forecasters expects 2011-12 to be a normal year for the Australian economy. If it's right, Reserve Bank governor Glenn Stevens and Treasurer Wayne Swan will go down on their knees to give thanks...
On average, the panel predicts Australia's GDP to record year-average growth of 3.2 per cent in this new financial year. That's in line with its long-term average growth, but significantly below the 4.5 per cent growth forecast by the Reserve Bank, or the 4 per cent forecast by Treasury.

The gap between the panel and the official line is partly due to the presence of Monash University's resident pessimist, Jakob Madsen, who, for the third year in a row, is forecasting Australia and the US to sink into recession. One day he'll be right, but hopefully not this time.

The other members of the panel on average forecast growth to be 3.5 per cent. That is probably more like the way Reserve hopes the year will turn out, since that would not require it to show the same activism on interest rates.

No panel members believe that growth will reach the 4.5 per cent predicted by the Reserve in May. Only six thought Treasury's budget forecast of 4 per cent growth would be met.

Commonwealth Bank chief economist Michael Blythe is at the head of the bull pack. He sees Australia growing by 4.3 per cent over 2011-12, thanks to continuing strong growth in China and the global economy. Unemployment would fall to 4.5 per cent by next June but well before then, the Reserve would have stepped in twice to raise interest rates.

Professor Madsen is alone at the other end of the forecast range, predicting Australia will follow the US into recession in coming months, cutting annual GDP by 1.4 per cent in this financial year.

But four other forecasters predict growth in this new financial year will be less than 3 per cent. They include Katie Dean at the ANZ (2.5 per cent), Paul Brennan of Citigroup (2.9 per cent), Saul Eslake of the Grattan Institute (2.8 per cent). Worryingly, Neville Norman of Melbourne University predicts growth to be just 2.1 per cent.

That is worrying because for the second year in a row, Professor Norman has won the Palme d'Or as the most accurate forecaster in our survey. Two years ago he was one of few optimists to see a solid recovery coming. But last year, as now, he was the wary one, predicting below-average growth as higher interest rates held activity back.

Professor Norman sees China booming in the year ahead but the US floundering. That would slow global growth, bringing the Australian dollar back below parity, and sending unemployment back up, albeit only to 5.3 per cent by mid-2012.

The panel as a whole expects global growth to edge down slightly to 4.1 per cent in 2011, held back by slower growth in the US (2.6 per cent), Europe and Japan. There are differing opinions about China, where growth forecasts for 2011 range from 10.6 per cent (Professor Norman) to 8 per cent (Greg Evans of the Australian Chamber of Commerce and Industry).

For the most part, the panel expects unemployment to edge down over the next 12 months, to 4.7 per cent by mid-2012. No one sees a dramatic change ahead: the range of forecasts is between 4.2 and 5.5 per cent.

The panel as a whole expects the budget deficit to be halved to about $22 billion, a tad under Treasury's own forecast. But a few, including government insider Heather Ridout of the Australian Industry Group, predict it will end up a lot better than officially forecast, while a couple, including the outsiders at ACCI, predict it will end up a lot worse.

All the panel, apart from Professor Madsen, expect the Reserve to raise interest rates at least once by Christmas. An interesting detail: five of the 10 panel members from financial institutions, including ANZ, Commonwealth Bank and NAB, predict two rate rises by then but no one outside the financial sector shares that view.

The panel also divided over the future of the dollar. Four forecasters predict it to rise to $US1.10 by New Year's Eve; four think it will stay more or less where it is; five think it will edge back closer to parity; while six expect it to drop back below parity. John Rothfield of Merrill Lynch is the currency bear, tipping it to close the year at US93?.

Most of the panel expect a gradual rise in share prices over the new financial year. Of the 14 forecasters who chanced their hand at tipping the market, 11 see it heading up, on average predicting the S&P/ASX200 index to be nudging 5000 by New Year, and above 5300 by mid-2012.

But Professor Madsen expects it to sink to 4000, while our two Evans - Bill Evans of Westpac and Greg Evans of ACCI see global jitters nudging the index down over the six months, and, in Greg's view, next year too.

On one of the big issues for the Australian economy, the panel shares a broad consensus that commodity prices are now nearing their peak and will be falling in the first six months of 2012.

On average, the panel predicts Australia's terms of trade (the ratio of export prices to import prices) to rise about 6 per cent between now and the end of the year then lose nearly all of that by next June to end the financial year where they started.

Some disagree. Katie Dean of ANZ sees the terms of trade continuing their rise into 2012, but at slower pace. But Master Builders economist Peter Jones joins Greg Evans in predicting that they've peaked already, with the terms of trade to sink 5 per cent in the rest of the year and 10 per cent in early 2012.

The official family probably wouldn't mind that at all, as it would reverse our path towards a two-speed economy. But they're not expecting it.

Published in today's Age

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