Saturday, January 05, 2013

2013 Economic Survey. Weak, but muddling through

Click on the panels to enlarge

First the good news. None of our panel expects a recession. All expect a record 22nd year of continuous economic growth. But it will be weak. Treasurer Wayne Swan says he is aiming for “trend” growth, which means growth close to Australia’s long-term trend of 3.25 per cent. But only three of our panel expect growth anything like that growth this financial year. Only six expect it this calendar year.

The weakest forecasts put growth at less than 2 per cent. The average forecasts are for 2.6 per cent this financial year and 2.6 per cent over the year to December.

The forecasts suggest the government won’t make enough money to return the budget to surplus by June as it itself has now acknowledged. Only three forecasters think it could get there - they are Michael Workman of the Commonwealth Bank, Alvin Pontoh of TD Securities and Stephen Koukoulas of Market Economics, who until recently was Prime Minister Gillard’s economic advisor. They’re picking surpluses of between $1 billion and $1.5 billion. All the rest go for deficits of between $5 billion and $20 billion. The numbers sound big, but they are a huge improvement on the $43.7 billion deficit recorded last year. Swan will be able to argue his finances are moving in the right direction.

“The budget deficit will have still fallen sharply, it’ll be in far better shape than most other developed countries,” says AMP Capital’s Shane Oliver. “I think we and financial markets will be able to live with a delay in the return to surplus.”

The BusinessDay economic survey uniquely incorporates the views of financial markets economists, academic economists and two working in industry groups - the Australian Industry Group and the Australian Workers Union.

A year ago its average forecast correctly picked Australia’s economic growth rate of 3 per cent and picked a December unemployment rate of 5.5 per cent (the latest is 5.2 per cent) and a Chinese economic growth of 8.1 per cent (the latest is 7.4 per cent).

This year the average international forecasts are for continuing strong Chinese growth of 7.8 per cent and for United States growth of 2.3 per cent. The US forecast is built on the assumption legislators reach a lasting agreement to avoid the worst of the “fiscal cliff” which had threatened to scale back tax cuts and government spending at the end of last year. Steve Keen of the University of Western Sydney lacks that confidence. He is predicting zero economic growth in the US this year and deeply recessionary growth of 1 per cent worldwide. The average global forecast for the year ahead is 3.1 per cent, little changed on anemic year just passed.

But Australia’s terms of trade will continue to slide... In the twelve months to September export prices have slipped 14 per cent relative to import prices, in the September quarter alone they slid 4 per cent. Iron ore prices have recovered since then, climbing from a low of $US87 a tonne to $US135, but on balance our panel expects our trading terms to remain weak, being down 6 per cent over the course of the year to June 2013 and 3 per cent over the course of the year to December 2013. A small number expect the terms of trade to lift throughout 2013. The National Australia Bank’s Alan Oster expects a boost of 5.5 per cent. But none expect a lift over the course of the financial year. The decline to date has been great.

As a result business investment (especially mining investment) will grow far more slowly than the 20 per cent per annum plus we have been used to. The average forecast is for 5.4 per cent over the course of 2013, but the range of forecasts is particularly wide, from continuing blistering growth of 16.5 per cent predicted by Melbourne University’s Neville Norman to a decline of 5 per cent forecast by Macquarie Group’s Richard Gibbs.

Most of the panel expect housing investment to fill some of the gap left by mining. After sliding by around 6 per cent in the past year, housing investment should climb 5 per cent according to the average forecast. Only one of the panel expects housing investment to continue to slide - Jakob Madsen of Monash University who is expecting a fall of 5 per cent. Neville Norman is the most bullish, predicting a recovery of 10 per cent.

Household spending, at present growing at an annual rate of 3.3 per cent, is expected to weaken to 2.9 per cent. Brad Crofts of the Australian Workers Union expects the most, 4.5 per cent; former former Treasury modeller Stephen Anthony of Macroeconomics the least, 1.8 per cent.

On interest rates the panel on balance expects only one cut in the year ahead, but the forecast range is wide: from Gibbs, Anthony and Keen who expect four more cuts taking the cash rate to an ultralow 2 per cent, to Norman, University of Tasmania modeller Mardi Dungey and former Reserve Bank economist Paul Bloxham who expect between one and three interest rate hikes.

Governor Glenn Stevens himself has indicated his immediate decision will be whether to cut, telling Fairfax Media in December: “whether or not we need to go lower, we’ll see how that turns out in the new year.”

The panel believes he will do whatever is necessary to stop unemployment climbing too much higher, with none except the most pessimistic of the growth forecasters, Richard Gibbs expecting the unemployment rate to climb above 6.3 per cent. Paul Bloxham expects it to stay where it is, at 5.2 per cent.

Inflation will provide little impediment in the view of the panel. None expect the headline inflation rate to climb above 3 per cent. Ahead of the carbon tax in June opposition leader Tony Abbott said its impact on the cost of living would be “almost unimaginable”. His treasury spokesman Joe Hockey said it would “drive up the price of everything.” At a year-end press conference Abbott said the treasurer’s decision to abandon his pledge to deliver a 2012-13 surplus would drive prices even higher. But the panel expects a perfectly contained headline inflation rate of 2.5 per cent - exactly the middle of the Bank’s 2 to 3 per cent target band. The so-called underlying inflation rate monitored by the Reserve Bank would be a touch lower at 2.4 per cent - even less a cause for concern.

Two forecasters - Koukoulas and Keen - are predicting an excessively low underlying inflation rate of 1.5 per cent, a rate so low as to effectively require action by the governor Stevens to reflate the economy under the terms of its agreement with the treasurer.

Four of our panel have views on the Australian dollar that would greatly please him. In December he observed the dollar was “a bit on the high side”. Unless it comes down in line with the terms of trade it will hard for trade-exposed parts of the economy to pick up the baton from mining investment as it comes off the boil. Su-Lin Ong of RBC Australia, Saul Eslake of Bank of America Merill Lynch and Bloxham and Norman expect the dollar to fall below $US1.00, but none of the others do. The highest forecast is for an Aussie of $US1.05 in a year’s time; the lowest is for is for 95 US cents.

In today's Sydney Morning Herald and Age

And the keenest forecast....

This time last year only one of our forecasting panel was bold enough to say the Reserve Bank would cut its cash rate to 3 per cent by December 31.

It had just cut the rate twice from 4.75 to 4.25 per cent. The equivalent of five more cuts followup cuts was unthinkable, except for Steve Keen. The University of Western Sydney iconoclast is famously prepared to back his judgement. Two years ago he walked 200 kilometers from Canberra's Parliament House to the top of Mount Kosciuszko wearing a shirt reading: "I was hopelessly wrong on house prices – ask me how," after losing a bet with Macquarie Group economist Rory Robertson. A year before that he took out this column’s prize for most accurately picking the global financial crisis. Most of the rest of the BusinessDay panel didn’t think it wouldn't happen.

Professor Keen is also the only member of our panel to come close to forecasting the inflation rate. He picked a mere 2 per cent by December (which is exactly the most recent published figure). The other forecasts were centred around 2.8 per cent - not shabby, but not Keen.

Keen’s pessimism flowed from a belief global growth would slide to near 3 per cent (which it did) and that the terms of trade would collapse 10 per cent (which has probably an underestimate - in the first nine months of the year they collapsed 9 per cent). But he was wrong about how badly the international downturn would hurt Australia. In the year to September Australia’s economic growth held up at 3.1 per cent (close to the average panel year to December forecast of 2.9 per cent). Keen had expected 1.7. Unemployment is 5.2 per cent, much closer to the panel’s average forecast of 5.5 per cent than to Keen’s 6.5 per cent.

He was off the mark because the government flicked the switch to deficit far more sharply than any of our panel expected. Keen thought Swan would finish 2011-12 with a budget deficit of $20 billion. The panel picked $35 billion. Swan gave us $43.7 billion.

It’s hard to believe now but a year ago only two of our panel thought the dollar would stay much above $US1.00. Only Katie Dean of the ANZ and Richard Robinson of BIS Shrapnel predicted a high dollar all year. They deserve special commendation. The panel’s average forecast was US 96 cents.

In today's Sydney Morning Herald and Age

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