Saturday, January 31, 2015

2015 BusinessDay Economic Survey. Economy weak, cash rate steady

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Fresh from its success in forecasting correctly that the Reserve Bank would go an entire year without a moving its cash rate, the BusinessDay forecasting panel is predicting a second year of the same.

The 25 eminent economists who make up the panel are predicting on average yet another 12 months of steady rates, meaning no change until all the way through to December 2015 - a record run of 28 months.

The panel comprises is made up of leading market economists, industry economists, academics and consultants. Over time its average forecasts have proved to be more reliable than those of any of its members.

The Reserve Bank's first meeting of 2015 next Tuesday will be keenly watched. Rate cuts in other countries, a sluggish Australian economy and a collapse in the rate of inflation are ratcheting up pressure on Australia's central bank to cut - but economists are sharply divided on whether the Bank will cut at all. Beneath the surface of the average forecast of a steady cash rate forecast lie sharp differences. Only about half the panel expects the rate to stay steady at 2.5 per cent. The other half expects it to either climb or fall.

Bill Evans of Westpac, James McIntyre of Macquarie Group, and Stephen Anthony of the consultancy Macroeconomics consultancy expect two cuts within months, bringing down the cash rate to an all-time low of 2 per cent, where they expect it will remain for the rest of the year.

McIntyre thinks the bank should have cut rates months ago, with Australia already in a per capita "demand recession", he says.

Steve Keen and Alan Oster expect one interest rate cut in the first half of the year, followed by another in the second. Oster says the weak jobs market and the slide in commodity prices argue for a cut, while the low inflation rate and cooling housing market suggest it can be afforded.

At the other end of the scale, Michael Workman of the Commonwealth Bank and Annette Beacher of TD Securities expect two hikes late in the year, lifting the cash rate to 3 per cent.

Workman says the lower dollar will do a better job of boosting  the economy than would a cut in rates, without the accompanying risk of overstimulating the housing market. He says While consumers and businesses do lack confidence, it isn't because their cost of funds is too high, he says.

Monash University's Jakob Madsen expects only one hike in interest rates, in the second half of the year. He says at 2.5 per cent the inflation-adjusted cash rate is already close to zero. He says The big problems facing the Australian economy are structural rather than than cyclical and a lower interest rate won't fix them, he says.

Saul Eslake and Chris Caton are among those expecting steady rates all year. Eslake says the Reserve Bank will would want to avoid cutting in order to leave something "up its sleeve'" in the event of another global shock. He says it's not clear that another cut of 25 or even 50 points would achieve what cuts of 225 points between November 2011 and August 2013 did, which is a lower unemployment rate. Caton says although he is not expecting it, the bank will would be forced to cut if the unemployment rate goes went through 6.5 per cent "with any velocity".

Housing expert Nigel Stapledon of the University of NSW says the main beneficiary of a lower rate would be housing, which at present needs no stimulus.

All of our panel prepared their responses before the deadline of January 12, meaning none were able to take into account the very low inflation figure released on January 28. While this put them all on an equal footing, it meant they were perhaps less inclined to foresee rate cuts than if the survey had been taken when the low inflation rate was apparent...

Their  average forecast is for a cash rate of 2.41 per cent by December, close to the present 2.5 per cent but slightly lower, meaning they believe a cut is more likely than an increase. The cash rate is only moved in increments of 0.25 per cent.

The panel's views more broadly about 2015 are not encouraging. Most expect weak economic growth and a further rise in unemployment. None expect a recession. Two expect a per capita recession - a shrinking of in the economic pie per person.

As is usual, the panel is forecasting an inflation rate of 2.4 per cent, the centre of the Reserve Bank's 2 per cent to 3 per cent target band. Steve Keen of Kingston University, London, is the only member predicting a headline rate outside the band, of expecting 1.5 per cent through the year, with an underlying rate of 1 per cent. Neville Norman of Melbourne University predicts a 2.05 per cent, with an underlying rate of 1.95 per cent.

Several of the panel expect wages to grow more slowly than inflation, resulting in a year of falling real wages following on the back of a year in which they barely grew. Michael Workman expects inflation of 2.7 per cent, with wage growth of just 2.2 per cent. Jakob Madsen of Monash University expects inflation of 2.5 per cent and wage growth of 2.2 per cent. Steve Keen expects inflation of 1.5 and wage growth of 1 per cent. Saul Eslake, Shane Oliver and Tom Skladzien of the Australian Manufacturing Workers Union expect zero real wage growth. The average forecast is wage growth of 2.6 per cent, just a touch above the average inflation forecast of 2.4 per cent.

None of the panel expects the present extraordinarily low bond rates to last. The 10-year bond rate has been less than south 3 per cent all year. This week it hit an all-time low of 2.48 per cent, about on a par with the long term rate of inflation implying a zero real borrowing cost. All of the panel but two expect a rate at or more than north of 3 per cent by December. Stephen Anthony expects 2.76 per cent, and Warren Hogan 2.1 per cent. The average forecast is 3.39 per cent.

There is precious little good news on jobs in the BusinessDay survey. All but three of the panel expect the unemployment rate to climb in the next six months. The average has it climbing from its present 6.1 per cent to 6.5 per cent by mid year, ending the year at 6.4 per cent. Stephen Anthony and Steve Keen expect an unemployment rate of 7 per cent.

Household spending is expected to grow no faster than it did last year, climbing by 2.5 per cent in real terms. Business investment is expected to slip another 4.8 per cent. Housing investment is expected to grow more slowly at 4.6 per cent.

Australia's gross domestic product is expected to grow by 2.6 per cent, about around the same as budget forecast but well down on the long-run trend. Population growth means GDP per capita should advance weakly at 1 per cent. Jakob Madsen and Neville Norman expect GDP per capita to shrink.

The panel expects Chinese economic growth to fall to 6.9 per cent in the year ahead, a 25-year low. It expects world growth of 3.5 per cent. Both are in line with the International Monetary Fund forecasts. It expects the recovering US economy to grow 2.9 per cent - a good deal less than the IMF forecast of 3.6 per cent.

On average the panel expects the slide in Australia's terms of trade to slow, with them losing only a further 3.6 per cent in 2015, but the average conceals a wide range from a further slide of 15 per cent to a lift of 7 per cent. None of the panel expects a dramatic recovery in the iron ore price. The forecasts range from a low of $US55 a per tonne to a high of $US86.

The panel expects the Australian dollar to slide lower throughout the year, ending at US77 cents, which is about where the Reserve Bank is said to have long believed it should be. But again the range of forecasts is wide, from a slide to US69 cents (Steven Anthony) to a rebound to US86 cents (JP Morgan's Stephen Walters).

The panel expects the 2014-15 budget deficit to come in slightly a touch worse than forecast at $43.8 billion. All expect it to fall the following year, to an average of $34.2 billion.

Much will depend on the strength of what the panel believes will be a tepid economy, on the Australian dollar, and on nominal gross domestic product, which drives government income. The panel expects nominal GDP growth of 3.7 per cent in 2015, an improvement on the 2.7 per cent recorded in the year to September, but still well down on the 9 per cent a year per annum recorded in the mining boom.

In The Age and Sydney Morning Herald

Wisdom in the crowds. How the BusinessDay 2015 panel got most things right

What our panel got right about 2014 it got spectacularly right. What it got wrong was awfully wrong.

First the spectacular successes. On average last year's BusinessDay panel expected economic growth of 2.7 per cent in the year to December. The most recent figure (for September) is exactly 2.7 per cent. It expected global growth of 3.3 per cent, which is exactly what we got. It expected a December unemployment rate of 6 per cent. The December figure was barely a whisker away at 6.1 per cent. And it expected an entire year without a move in the Reserve Bank cash rate – an extraordinarily rare occurrence and which is exactly what happened.

On these measures the average of the panel's forecasts was right in a way none of our individual panelists were.

But what the panel got wrong was often so wrong that not a single panel member came close.

The panel thought inflation would end the year at 2.5 per cent. It ended at 1.7 per cent, below even the lowest of the panelists' forecasts. The panel thought the 10-year bond rate was to end the year at 4.6 per cent. It ended at an extraordinary low of 2.8 per cent and has since fallen further. None of the panelists expected anything below 4 per cent. The panel thought the dollar would slip to 86US¢. It slid to 82. It thought the terms of trade would slip 4 per cent. They slid 9 per cent.

What the mistakes have in common is the late-year collapse in commodity prices. None of our panel saw the full extent of what was coming. Those that foresaw something include Tim Toohey of Goldman Sachs (a terms of trade collapse of 9 per cent), Stephen Anthony of Macroeconomics (who had the lowest inflation forecast of 2 per cent), Bill Evans of Westpac (who had the lowest bond rate forecast of 4 per cent), and Melbourne's University's Neville Norman and Macquarie Group's Richard Gibbs, who correctly picked the exchange rate of 82US¢ to the dollar.

But as near to right as about individual outcomes as some of our panelists were, none got the whole picture. The late-year collapse in oil and other prices was simply too dramatic (and perhaps too geopolitical) to see coming.

It's been a BusinessDay tradition for years to bestow the title of forecaster of the year on the panelist who got the most things right. Previous winners include Stephen Anthony, Jakob Madsen and Steve Keen. This year none are deserving of the award. The unexpected took everyone by surprise. Away from the unexpected, the average of the panelists' forecasts did very well indeed. The average was a better predictor than any individual forecast.

In The Age and Sydney Morning Herald

Related Posts

. 2014 forecast: Steady as she goes. Rates on hold all year

. 2013 forecast: Weak, but muddling through

. 2012 forecast: Made in China