Friday, December 30, 2011

2012 Economic Survey. We'll do okay, thanks to China

Read on

Interest rates are headed down, our stock market will climb, and we’ll survive whatever Europe throws at us.

That’s the consensus of the 20 economists polled for The Age end-of-year economic survey. Our terms of trade will slip in the year ahead, but not by enough to derail the Treasury’s and Reserve Bank’s pleasing forecast of economic growth close to trend.

China - the key to Australia’s prosperity - will be hit by a downturn in Europe, but not by as much as it would have been a few years earlier.

“Regional Asian growth is now much less dependent on strong external export markets,” Commonwealth Bank chief economist Michael Blythe told The Age. “Asia will be the stronger part of the global economy in the year ahead whatever the outcome elsewhere. A very high proportion of Australia’s exports to Asia are tied in with that domestic story.”

“Chinese planners have already announced an intention to de-emphasise capital formation and promote private consumption,” said Richard Gibbs of Macquarie Securities. “This should mean a less aggressive approach to maintaining resource stockpiles, but resilient underlying demand. Even in the event of a US and European recession, China’s demand for commodities would moderate, but would be unlikely to collapse.”

The panel expects Chinese economic growth of 8.1 per cent in 2012, not too far down on the most recent annualised reading of 9.1 per cent. World economic growth should slip to 3.3 per cent, lower than the most recent International Monetary Fund forecast issued in September ahead of renewed concerns about European debt, but above the 3 per cent benchmark it uses to define a global recession.

Several of our panel raised the possibility of the United States following Europe into recession...

“Europe is probably already in a mild recession, but if it deepens dragging the US into recession it will risk a sharper slowdown in Chinese demand for commodities and pose a real threat to Australia,” said the AMP’s Shane Oliver.

“Our assessment is that while Australia is not immune to a return to global recession, we do have plenty of ammo to fight it off – interest rates have a long way to go to zero, the $A will fall sharply if things really fall apart globally and there is more room for fiscal stimulus if absolutely needed.”

Ernst & Young’s David Cochrane said he expected a US recession.

“Our most recent forecast, prepared with Oxford Economics, predicts a Eurozone crisis that would result in 2012 European GDP sliding 1.1 per cent and United States growth slipping to 0.9 per cent. Both Europe and the US would have negative GDP in 2013. It would have a flow on impact on China, but we are confident about China’s long-term demand for commodities.”

The panel’s mean forecast has Australia’s terms of trade slipping 6.4 per cent as commodity prices slide, roughly in line with the projection in the government’s mid-year budget review, but the average disguises a wide range of forecasts - from zero change throughout the year to a collapse of 15 per cent. None of the panel expects the terms of trade to climb.

Interest rates will have to fall further to shield the economy from the weaker international environment, with the Reserve Bank likely to slice a further 0.45 points off its cash rate by June and 0.65 points by years’ end according to the average forecast. Significantly every one of the 20 economists on The Age panel expects at least one further cut before the middle of the year. Steven Keen of the University of Western Sydney has the most aggressive forecast - an entire 1.25 points worth of cuts, taking the cash rate down from 4.25 per cent to 3.0 per cent, all within the next six months. Richard Robinson of the consulting firm BIS Shrapnel is punting on the highest cash rate by year’s end - a jump to 4.5 per cent after a cut to 4.0 per cent by June.

None of our forecasting panel are particularly concerned about inflation in the year ahead with the 2 to 3.4 per cent forecast range closely matching the Reserve Bank’s 2 - 3 per cent target band.

The benign outlook for inflation gives the panel confidence that the Bank will be able to cut interest rates as needed should conditions sour more than expected.

“There is little doubt that the Reserve Bank would cut rates again if required,” said Michael Blythe. “More importantly, lower interest rates would work. Recent rate cuts have shifted the interest-rate sensitive parts of household sentiment.”

“The Bank can cushion any major slowdown emanating from Europe,” said BIS Shrapnel’s Richard Robinson. “It has considerable scope to cut rates, with lower underlying inflation now enhancing that likelihood. The government also has scope to cut taxes and boost spending, perhaps with a productivity-enhancing investment. And the dollar has plenty of scope to fall, perhaps even by 20 to 30 per cent, boosting internal Australian demand and helping exports.”

The Australian dollar will drift lower in the view of all but two of the panel, sliding from its present perch just above 100 US cents to perhaps as low as 90 US cents and more likely the mean forecast of 96 US cents. Only Richard Robinson and the ANZ’s Katie Dean are predicting a higher dollar at year’s end, opting for 102 and 105 US cents.

Australia’s Gross domestic product will grow a healthy 3 per cent over 2012 according to the mean forecast - close to its long-run trend, but well below the 4 per cent implied by the latest Treasury and Reserve Bank forecasts. The range of predictions is wide with former Reserve Bank economist Paul Bloxham of HSBC the most optimistic, sticking with the Bank’s forecast of 4 per cent and Neville Norman of the University of Melbourne and Steve Keen of the University of Western Sydney the most pessimistic, predicting 1.6 and 1.7 per cent.

There’s more unanimity about the unemployment rate, with none of the panel straying too far from the Treasury’s forecast of a climb from the present 5.2 per cent to 5.5 per cent by June where it would stay for the rest of the year.

The Australian share market will improve next year in the view of all but three of the panel. The mean forecast has the S&P/ASX 200 rebounding 10 per cent to 4494. But that won’t be enough to regain the losses of the past year, or even the losses since August. The index would climb to a mere two-thirds of its peak in 2007 before the global financial crisis.

Our panel’s central forecast is that good management in China and good management at home will help us dodge the next financial crisis as it did the last one, but anyone looking to claw back the enormous chunk taken from their super fund since 2007 will have to wait well beyond the year ahead.

Published in today's Age and SMH

About last year's forecasts. 'Twas the weather that did it.

Who’d have thought it? Certainly none of the 20-odd members of The Age economic forecasting panel this time last year.

The rate of inflation turned out to be higher than the highest of their predictions, the budget deficit bigger than the biggest, and the share market far lower than all but two thought likely.

It is trite to say it, but they didn’t know what was coming. Days after their forecasts were printed Queensland was hit by massive floods, and then a cyclone. Soon after, Christchurch faced an earthquake and Japan a tsunami.

The cyclone alone was enough to push inflation out of their ballpark. In the year to September it came in 3.5 per cent. Without sky high fruit and vegetable prices pushed up as the trees were torn down it would have been 2.9 per cent, which was exactly their average forecast. Underlying inflation is now very low and headed down and bananas are being picked again making this year’s average forecast of 2.8 per cent look pretty reasonable. Unless there’s a surprise.

The panel expected a hefty budget deficit 2010-11, but they reckoned without the cyclone, which help push it to $47.7 billion instead of the central forecast of $35.3. The panel thought the 2011-12 deficit would be $11.7 billion. Lower than expected coal income as mines are cleared of water, lower capital gains and higher than expected reconstruction spending are now projected to push it to $37.1 billion.

Don’t blame the government for failing to pick the share market malaise that stalled capital gains. Most of our forecasting panel had their heads in the clouds. The index began the year at 4970. The panel members who worked for stockbroking firms expected 5500 or more, among them Tim Toohey from Goldman Sachs, John Rothfield of Merrill Lynch, Annette Beacher of TD Securities and Shane Oliver of the AMP. The average forecast was 5169. In the event the market drifted down, not up as the panel had expected and then collapsed 200 points in August on renewed concerns about financial turmoil recurring. Only two members of the panel had expected the index to fall - Jakob Madsen of Monash University and Steve Keen of the University of Western Sydney, both academics. They had punted for 4000, more than one-thousand points south of the central forecast, which is about where it will end up.

By and large the panel overestimated the rate of economic growth and underestimated the rate of unemployment, which was to be expected given that they didn’t know about the natural disasters. Where they were too pessimistic was in their expectations about commodity prices. They expected terms of trade to fall rather than climb further, as did the Treasury, although they are slipping now.

It’s not fair to pick a winner out of last year’s panel. Those that were right about some things were right for reasons they couldn’t have imagined. Some of those that were wrong were wrong for the same reasons. No one could have got 2011 right. No one did.

Published in today's Age and SMH

Swan might make the surplus, he probably shouldn't:

It’ll be line-ball whether Wayne Swan gets his promised 2012-13 budget surplus, according to The Age economic panel.

Nine of our forecasters think he’ll get there, six think he won’t and one - Chris Caton of BT Financial Group - sits right on the fence, predicting a surplus or deficit of zero - a budget that is exactly balanced.

All think a return to surplus matters, although most think it is not crucial it happens in 2012-13.

“Whether its achieved in 2012-13 or a year or so later is neither here nor there given that Australia’s budget deficit is small by global standards and net public debt is trivial,” says Shane Oliver of the AMP. “What matters is going in the right direction over time.”

“Swan has put a lot of political capital into regularly announcing that a surplus is on the cards for 2012/13, especially on the global stage,” says Annette Beacher of TD Securities. “However, as we believe global growth is approaching stall speed, a slippage into 2013/14 should not be seen as a weakness, but as a platform for growth.”

Richard Robinson of BIS Shrapnel believes the economy will be much healthier in 2013-14 with unemployment heading below 4.5 per cent. “That’s the time for a surplus, it can be larger than has been budgeted,’ he told The Age.

One panel member supports Treasurer Wayne Swan in his apparent determination to achieve a surplus in 2012-13 no matter what.

Jakob Madsen of Monash University told The Age it was “vital that the government aims for a surplus regardless of the international and the domestic conditions”.

“Europe and the United States face deep recessions almost entirely because of their large foreign debts. Australia has excessive foreign debt due to excessive consumption and demand for private property. The only way to stay afloat in the long run is to run a significant surplus to make up for the excess spending in the private sector.”

“Financial markets react adversely to excessive debt through lower stock prices, lower willingness to lend and higher bond rates. These adverse effects overrule the positive effects of government demand.”

Professor Madsen isn’t too confident his advice will be heeded. He is predicting a $10 billion deficit in 2012-13, the year Wayne Swan has promised a small surplus.

But the weight of numbers is with Mr Swan. The median (middle) forecast is for a small surplus of between $100 million and $1 billion. The average forecast is for a deficit of $3.6 billion, but it is weighed down by three very big deficit forecasts; those of Professor Madsen and Melbourne University’s Neville Norman and Western Sydney University’s Steve Keen. Professor Norman foresees a deficit of $20 billion; Professor Keen, $30 billion.

Published in today's Age

Past surveys

. A normal year ahead? The July 2011 survey

. Before the flood. The December 2010 survey

. The July 2010 Age Economic Survey

. "Happy New Year" - the December 2009 Age economic survey