Saturday, July 06, 2013

2013-14 Economic Survey. Australia tipped to muddle through

Tim Colebach:

Australia's growth in 2013-14 will be slow, but it won't stop. The mining investment boom has probably peaked, but will decline only gradually. Unemployment will rise in coming months, but will stay below 6 per cent.

The key message from Australia's independent economists in Fairfax Media's half-yearly economic survey is that the economy is unlikely to meet official growth forecasts in 2013-14, or, for that matter, 2014-15. The baton change from mining investment to other drivers of growth will not be smooth.

But the consensus is that Australia will muddle its way through, without suffering too much damage. In 2013-14 the economy is forecast to grow by 2.35 per cent. That is appreciably less than Treasury's budget forecast of 2.75 per cent growth, but it roughly maintains the growth pace of recent months.

By 2014-15, most of the 27 economists surveyed expect the economy to be picking up speed, growing by 2.75 per cent. The budget has forecast 3 per cent growth, which has become the new trend growth rate since 2000.

If the population keeps growing at its current rate of 1.75 per cent, that implies that growth per head - the economy's real bottom line - will be just 0.6 per cent this year and a modest 1 per cent in 2014-15. That is well below its trend growth rate of 1.5 per cent.

The survey, bringing in economists from financial institutions, universities, consulting firms and industry groups, has done a remarkable job of forecasting recent economic trends. Two years ago, when the Reserve Bank forecast growth of 4.5 per cent in 2011-12, and Treasury tipped 4 per cent, our panel predicted it would be just 3.2 per cent - very close to the actual growth rate of 3.4 per cent.

A year ago, the budget forecast growth in 2012-13 to be 3.25 per cent, and the Reserve Bank forecast 3 to 3.5 per cent. Our panel predicted it would be just 2.9 per cent, and for the three quarters to March, that has been exactly on target.

This year's forecasts differ significantly from the budget forecasts in three areas:

■The panel is far less optimistic about export prices. While Treasury predicts that the terms of trade - the ratio of export prices to import prices - will largely hold its ground in the next 12 months, declining only 0.8 per cent, the panel predicts it will fall by 4.9 per cent, implying further pressure on Australia's high-cost mines.

■The budget assumed that the peak of the mining boom is still ahead, tipping business investment to rise a further 4.5 per cent in 2013-14, generating an extra $12.5 billion of output. Since then, the March-quarter national accounts have shown business investment peaked last September, making our panel far more pessimistic.

On average, the panel forecast business investment to decline by 0.6 per cent in 2013-14, cutting $1.5 billion off the nation's output. After a decade in which business investment grew on average by more than 10 per cent a year, that would be a dramatic change, especially in the resource states.

■Treasury's budget forecasts assumed that lower interest rates would reignite consumer spending, which it predicted would grow by 3 per cent in 2013-14. Again, recent data suggests the ''green shoots'' celebrated in January and February have withered since. The panel is less sanguine than the budget, on average tipping consumers to buy only 2.4 per cent more in 2013-14 than they did last year.

That implies another tough year for traditional stores, with online retailers and service providers already taking most of the growth in retail spending. It is also bad news for state governments, which rely heavily on the GST collected by retail stores to fund their services.

While many in our panel believe the Australian dollar needs to fall significantly further to restore the global competitiveness of non-mining industries such as manufacturing and tourism, few expect it to happen in 2013-14. On average, the panel expects the dollar to shuffle down to US91¢ by Christmas, and US89¢ by mid-2014.

They don't see the global economy as much help either. The panel expects China's growth in 2013 to slow to the 7.5 per cent set by the Chinese government as its minimum benchmark. The US economy would grow just 2 per cent, with global growth underperforming again at just 3.15 per cent.

But, as always, there is a wide diversity of views on the panel, as you can see from the individual forecasts spelt out below. While everyone has their individual insights, the forecasts and accompanying comments show three broad streams among our panel members.

The optimists share the view of Treasury and the Reserve Bank that economic growth will be close to trend this year, and accelerate into 2014-15, as mining exports gather pace, the lower dollar lifts trade-exposed industries, and lower interest rates stimulate a housing recovery and higher consumer spending.

Three market economists - BT's Chris Caton, Citi's Paul Brennan and TD Securities' Alvin Pontoh - predict that there will be no more rate cuts and the Reserve's next move will be to lift interest rates early next year. They expect growth to average 3 per cent over the next two years and unemployment to stay in the fives.

The middle ground of panellists expect one more rate cut this year, with the Reserve then likely to stay on hold. They, too, see the economy picking up speed in 2014, with a bit of help from the dollar.

The pessimists are not too pessimistic: they expect the Reserve to move fast to nip trouble in the bud, with two or three rate cuts by Christmas. Most believe that will see the economy return to trend growth by 2014-15.

Tim Toohey, of Goldman Sachs, Bill Evans, of Westpac, Su-Lin Ong, of RBC, and Greg Evans, of ACCI, tip two interest rate cuts by Christmas, while Macquarie's Richard Gibbs predicts three.

The market economist most worried about 2014-15 is Merrill Lynch's Saul Eslake. He warns that by then mining investment will start falling off the cliff - dragging growth down to 2 per cent and blowing out the federal budget.

In a category of their own are our resident pessimists, Jakob Madsen, of Monash University, and Steve Keen, recently retired from the University of Western Sydney. Keen is the only panel member to forecast a recession. He predicts output will slump 0.5 per cent this financial year, as China's growth slows to 6 per cent, causing commodity prices to crash and take the dollar with them. The dollar's fall would at least mean a rapid rebound in 2014-15.

Madsen picks growth to slow, to 1.5 per cent this financial year and just 1 per cent in 2014-15. He, too, sees China's growth slowing abruptly, but he also sees the Reserve Bank reversing course to raise rates in response to higher expectations of inflation and federal budget deficits.

Melbourne University's Neville Norman, our top forecaster in 2009-10 and 2010-11, sketches an unusual scenario: lowish growth this year (2.22 per cent), which then accelerates dramatically to 3.8 per cent in 2014-15, as China defies the sceptics, households replace ageing durables, and a new federal government lifts business confidence by tackling the deficit - among other things, by lifting the GST to 18 per cent.

Now that would be an interesting future.

In The Age and Sydney Morning Herald

Forecasters come up trumps but BT in lead

Don't say we didn't warn you. This time last year, our economic survey forecast that Australia would grow more slowly in 2012-13 than the government said.

The panel predicted that unemployment would rise to 5.5 per cent. It forecast that our terms of trade would plunge.

It forecast that the dollar would fall, but the sharemarket would rise. It forecast two of the Reserve Bank's three interest rate cuts.

It wasn't a bad set of forecasts, was it? A big pat on the back for our panel, who had a very good year.

The budget forecast growth in 2012-13 to be 3.25 per cent. Our panel was more conservative, going for 2.9 per cent. On figures published for the first three quarters, that was spot on.

Many of our forecasters were very close; it's too early to tell who wins gold.

The panel itself wins the gold medal for forecasting that unemployment would climb to 5.5 per cent by June and that underlying inflation would remain at 2.4 per cent despite the carbon tax.

Andrew Hanlan from Westpac, Burchell Wilson from ACCI and retired Treasury official Des Moore had the best crystal balls on interest rates, tipping three rate cuts in 2012-13.

One thing the panel got wrong was business investment. Most went with the budget forecast that the boom would steam on, with business investment rising 12.5 per cent. But two saw it ending: Andrew Boak of Goldman Sachs, who tipped year-average growth of just 6.9 per cent, and Master Builders Australia economist Peter Jones, who tipped 7.5 per cent. The Goldman Sachs team wins that gold medal, but Jones picks up another for his bullseye tip that housing investment would rise just 0.5 per cent. Just as well he works for the MBA.

The blowout in the budget from small surplus to big deficit took most of our market economists by surprise, but not Tom Kennedy of JPMorgan, who tipped a $15 billion deficit. But he was pipped by university economists Neville Norman (Melbourne) and Jakob Madsen (Monash) who split the gold, forecasting deficits of $18 billion and $20 billion, respectively.

The most stunning forecasting effort, however, came when BT economist and wit Chris Caton sat down to tip the markets.

Chris, we wish we could afford to pay you, but we trust you made a moolah by backing your own tips. From Fairfax Media, we award you our Palme d'Or as forecaster of the year.

In The Age and Sydney Morning Herald