Tuesday, July 28, 2015

Low growth ahead. Why the Reserve Bank won't ride to Abbott's rescue

Don't expect another cut in interest rates

It's true that Reserve Bank governor Glenn Stevens is holding open the possibility of further cuts. It remains, he said last week, "on the table". But further cuts are far less likely than they would have been, for three reasons also spelled out in last week's speech.

One is that the Australian dollar has plunged to about where the Reserve Bank wants it. In the past Stevens has said it was "too high", overvalued, "and not just by a few cents".

Invited to repeat his comments last Wednesday he said merely that the dollar was "adjusting, as you would expect".

He had previously nominated a target of US75¢. The dollar has since fallen to US73¢, a six-year low. If the wish for a much lower dollar was ever a secondary consideration in Stevens' decisions about interest rates, it isn't now.

Another reason is his fear there will come a point when further cuts encourage dangerously reckless borrowing. "Monetary policy works partly by prompting risk-taking behaviour," he said in Sydney last week. "Beyond a certain point, it can be dangerous."

Although that hadn't been the case to date, Stevens said in the future he would need to look more closely at whether further cuts boosted "sustainable economic growth rather than simply boosted growth".

And another reason – the most important – is that the bank is in the process of lowering its ambition. It is preparing to accept a more modest rate of economic growth than it was only months ago.

Let me explain...

Next Friday the bank will release its latest forecasts for economic growth. It is likely to revise them down, as it has done in each of the past four quarters. This time the revision should bring them so low as to be inconsistent with its widely understood target for economic growth, which is somewhere between 3 and 3.25 per cent.

The bank calls its target "trend growth". The trend for the past decade or so, it is thought to be the sweet spot above which inflation starts to climb and below which unemployment starts to rise.

The bank cuts, or lifts, interest rates until it gets growth back to trend, or so it had been thought. Until Wednesday.

Stevens began his discussion of the trend by pointing out that, oddly, jobs growth has picked up this year even though growth had been, "according to the available statistics, below trend".

It's been well below trend at present 2.3 per cent, although currently forecast by the bank to return to 3.25 per cent in 2016-17 – and it defies conventional wisdom for the unemployment rate to be falling, as it has been all year, while growth remains anaemic.

Stevens said it was possible that either the employment statistics or the growth statistics were wrong. It was possible too that our present unusually restrained wage growth was keeping people in work who otherwise be out of work.

But then he raised another possibility: that the actual trend is "lower than the 3 per cent or 3.25 per cent we have assumed for many years".

If so, the Reserve Bank would have no reason to cut rates from here on, even if it was to forecast growth never reaching 3 or 3.25 per cent, as it may be about to do next Friday.

This isn't as bad as it sounds, he hastened to add. What matters for ordinary Australians is growth per head. This needn't dip much as total growth dips because Australia's population growth is growing more slowly.

It is a measure of how new the governor's thoughts are that until now the bank's quarterly roundup of economic statistics hasn't even included growth per head. The update is scheduled for next Wednesday.

If not 3 to 3.25 per cent, what is the bank's new growth target? Modelling by former Reserve Bank official Paul Bloxham suggests it's 2.50 to 2.75 per cent, which is not too far away from what we have now. He believes that as things stand, growth any higher than 2.50 to 2.75 per cent will push up inflation and not be welcomed by the bank.

If so, an end to rate cuts may be the least of our problems. The budget deficit forecasts are predicated on a rebound in economic growth to 3.25 per cent. If the rebound doesn't happen, if growth misses the target by 0.50 percentage points, future budget deficits will be far deeper than forecast in May – as much as $10 billion per year deeper by 2020 and $30 billion per year deeper by 2025, according to the parliamentary budget office.

Extra tax, whether from the GST or somewhere else, will become essential. Tony Abbott used to say that the former government didn't have have a revenue problem, it had spending problem. Whether that was true or not, it won't be true for Abbott now. He'll have to raise revenue from somewhere.

His efforts to do it will probably depress growth further. The Reserve Bank has made it clear there are limits to how much it can help him out.

In The Age and Sydney Morning Herald

$50 million up in smoke defending plain packaging

Australia's legal bill for defending its cigarette plain packaging legislation is set to hit $50 million as it battles to contain a case brought by tobacco giant Philip Morris before an extraterritorial tribunal in Singapore.

And that is just for the first stage. If in September the three-person extraterritorial tribunal decides Australia has a case to answer, the hearing will move on to substantive matters and the bills will become far bigger.

The West Australian newspaper revealed on Tuesday that former treasurer Wayne Swan was called to Singapore in February to give evidence for Australia in a secret hearing.

Among the witnesses called by Philip Morris has been former High Court judge Ian Callinan, who was quizzed about administrative law.

Australia has succeeded in getting the case split into two. The first part will decide whether Philip Morris Asia has a right to bring the case.

Philip Morris Asia bought Philip Morris Australia Limited in early 2011 as the plain packaging legislation was being prepared. Australia is arguing this means it can't claim that the law hurt it, because it bought the company "in full knowledge" of Australia's intentions.

If Australia fails in September it will continue to fight the case, calling former health minister Nicola Roxon and her then departmental secretary Jane Halton as witnesses.

Philip Morris has been able to bring the case despite losing an appeal against Australia's laws in the High Court because of a so-called investor-state dispute settlement clause in an obscure Hong Kong Australia investment agreement.

Such clauses have been included in two of Australia's recently concluded free trade agreements, with Korea and China. They allow foreign corporations (but not local corporations) to sue for expropriation.

Such cases were rare until the early 1990s, but the Productivity Commission says there were 42 worldwide last year.

Speaking from Hawaii on the sidelines of talks expected to wrap up the Trans Pacific Partnership agreement with Australia and 11 other Pacific-facing nations, La Trobe University public health specialist Deborah Gleeson said she feared Australia would be unable to carve out sufficient exemptions.

Australia has asked to exempt the Pharmaceutical Benefits Scheme, Medicare, the Therapeutic Goods Administration and the Office of the Gene Technology Regulator from investor-state dispute settlement procedures.

"There is likely to be a lot of unhappiness among other countries about specific Australian programs being carved out, because that begs the question of what happens to their programs," she said.

The United States has secured an investor-state dispute settlement in each of its agreements apart from the 2005 Australia-US agreement, in which the Howard government refused to give way.

Trade Minister Andrew Robb said from Hawaii that Australia was party to investor-state dispute settlement provisions in 29 agreements and "the sun has still come up".

The talks continue until Friday.

In The Age and Sydney Morning Herald

Tuesday, July 21, 2015

Done right, negative gearing can work

Spot the odd one out:  the treasury's tax discussion paper, the Murray report into the financial system, the Organisation for Economic Co-operation and Development and the Reserve Bank have all come out in favour of a re-examination of negative gearing or the capital gains tax concession that underpins it

It's only the government that is holding back. "We're not going to fiddle with negative gearing because the last time a Labor government fiddled with negative gearing, it destroyed the rental market in most of our major cities", a defiant prime minister told a Liberal state council meeting last week.

Never mind that he's wrong. Readily available graphs show that rent increases slowed in more cities than they rose when Labor temporarily wound back negative gearing in the mid 1980s. Never mind that in every city rents have increased faster since the reinstatement of negative gearing than they did in the years when it was wound back. Never mind that the explosion in negative gearing since the turn of the century has helped push house prices beyond the reach of genuine buyers.

Negative gearing and the associated capital gains tax concession aren't the only reason houses prices are soaring. But they are part of the problem, a part that can easily be dealt with without hurting renters or anyone else (including investors presently negatively gearing).

Tony Abbott's stand is more about differentiating himself from Labor than it is about getting people into houses. It's about rhetoric rather than results.

In order to examine why house prices are soaring beyond the reach of ordinary Australians it's necessary to first establish that they are. After all, didn't research conducted within the Reserve Bank unveiled this month conclude that house prices were actually undervalued?

Last week's Reserve Bank submission to the parliament's home ownership inquiry shows typical homes now cost more of the typical wage than ever before – in excess of five times the average disposable income. Back in 1990 they cost three times the average disposable income. Before negative gearing took off at the turn of the century they cost four times the disposable income.

But the RBA says that doesn't necessarily mean houses are less affordable...

Record low mortgage rates have pushed down the cost of repayments to well below their decade long average. Compared to renting, buying is exceptionally cheap according to the preliminary research. Taking into account the high likelihood of continuing low rates the research finds that, compared to renting, paying off a home is cheaper than it's been in three decades.

Except that that's not the end of it. Cheap repayments aren't much help if you can't afford the deposit.

The RBA's submission shows that the typical cost of a deposit is higher than it has ever been, around 100 per cent of average disposable income – or it would be, were it not for the fact that many lenders have relaxed their standards.

But it says even taking into account of relaxed standards, deposits are more expensive than they used to be, forcing Australians without very good access to cash to either postpone or forget about buying a house. Typically these people are young, and without well-off parents to help them out. High prices are entrenching inequality.

A frightening graph in the Reserve Bank's submission shows the home ownership rate among middle-income Australians has slid since the turn of the century while the rate among high-income Australians has held up.

The turn of the century is when prices took off, climbing faster and for longer than ever before. A few months earlier in September 1999 the Howard government excluded from tax half of every capital gain, making negative gearing suddenly much more attractive (for shares as well as property). Until then, if you used losses to cut your taxable income you still had to face tax when you eventually sold. Afterwards you could deduct 100 per cent of your annual losses but be taxed on only 50 per cent of your eventual profits.

An extraordinary one in 10 Australian taxpayers became negative gearers. In order to get the properties they had to push up prices and elbow out would be owner-occupiers. Sure, they could have built new homes rather than buy existing ones, but they lacked the patience. Fourteen out of every 15 dollars borrowed for investment housing is spent on existing homes.

Labor is considering a proposal to put negative gearing to work. It would allow existing negative gearers to keep doing what they are doing. No-one would be rushed into selling anything. Anyone who wanted a new negatively geared property would have to build it. It's the same rule we apply to foreign investors. They are allowed to build but not to buy. The Melbourne-based McKell Institute reckons it would boost the supply of new houses by 10 per cent while boosting the annual tax take by $1 billion.

Labor ought to be able to sell it. It can rely on the treasury, the Reserve Bank, the OECD and the financial system inquiry for tacit support. Only the government is out of step. Labor can position itself as the party of more affordable housing.

In The Age and Sydney Morning Herald

Australia flying blind on trade deals says PC

On the eve of negotiations expected to finalise a giant trans-Pacific free trade agreement with 11 of Australia's neighbours, the Department of Foreign Affairs has revealed that none of Australia's existing agreements has been subjected to an independent analysis to work out whether the claims made for it have stacked up.

Australia signed its Closer Economic Relations agreement with New Zealand 32 years ago and its free trade agreement with the United States 11 years ago.

Giving evidence to a parliamentary inquiry on Tuesday, the department's first assistant secretary for trade agreements, Frances Lisson, said economic assessments were sometimes conducted before agreements were signed.

Asked whether any of that modelling had been subsequently checked against the actual outcomes, she replied: "Not that I am aware of."

"I am not aware of any economic modelling that's been, I guess, remodelled," she said. "But certainly the objectives and that are outlined in the feasibility study are very much part of the negotiated outcomes, so the free trade agreements are only entered into when they achieve the objectives that have been set out to begin with."

Labor MP Jim Chalmers expressed incredulity saying that the department was asking Australia to believe claims about future agreements with India and the Pacific bloc when it hadn't checked the claims it had made in the past.

Ahead of the US Australia Free Trade Agreement the department published modelling conducted by the Centre for International Economics that said it would boost Australia's gross domestic product by $5.7 billion. A study conducted a decade later by the Australian National University found it had boosted trade not at all.

The privately-owned centre was retained by the department again this year to examine the free trade agreements with Japan, Korea and China and found they would boost the economy by $24.4 billion by 2035.

Appearing before the inquiry the head of the Productivity Commission Peter Harris said such analysis needed to be genuinely independent of Australia's trade negotiators, otherwise the consensus in favour of trade reform would crumble.

The Commission itself was perfectly capable of doing it, although he said he wasn't using the inquiry "to solicit for work".

It should be conducted before negotiations begin and again in the four or so months after negotiations have concluded but before the deal is ratified.

"We should do better on transparency or we risk losing the consensus that has lasted for decades," Mr Harris said.

The analysis should first identify the problem that the trade agreement was designed to solve and then make clear the costs it would impose on business.

The recently-signed Korea Australia agreement included 5200 separate so-called rules of origin delineating which inputs included in an export in order to give it preferential treatment. An earlier agreement with Singapore had one.

"It's red tape, growing at a very healthy rate," he said.

"It adding to the compliance costs of businesses as well as the costs to governments."

So-called investor-state dispute settlement clauses included in the China and Korea agreements and planned for the Trans Pacific Partnership agreement would allow foreign but not domestic business to sue Australian governments in international tribunals.

"We would like to see analysis conducted that demonstrates the benefit," Mr Harris said. "We are not alone on this. Senior representatives of Australia's legal system have questioned why rights should be made available to foreign parties that are not available to domestic parties."

In The Age and Sydney Morning Herald

Sunday, July 12, 2015

Why our most livable city is Melbourne - or Sydney, or Canberra

You want to live somewhere better than where you are, right? Who wouldn't, given the weather we've been having? It ought to be easy enough to work out where. At this week's economists conference in Brisbane, Melbourne-based Daniel Melser, a senior lecturer in economics at RMIT, outlined the results of calculations by human resources firm Mercer, the Economist Intelligence Unit and the Property Council of Australia.

Each calculates a livability index from the bottom up. They aggregate scores for things such as the natural environment and access to housing and health services to come up with a total livability score. Two of the surveys assign their own scores to the component parts, one surveys Australians to work out the scores for the component parts.

The overall winner (according to Mercer) is Sydney. It's the 10th most liveable city in the world, beaten internationally by only Vienna, Zurich, Auckland, Munich, Vancouver, Duesseldorf, Frankfurt, Geneva and Copenhagen. Melbourne is further behind in 16th place, behind Toronto.

Which is odd, because when the Economist Intelligence Unit does the calculations, it finds Melbourne to be Australia's most livable city. Actually it finds Melbourne to be the world's most livable city – out of 140 – eclipsing stars such as Vienna, Vancouver, Toronto, Adelaide, Calgary, Sydney, Perth and Auckland.

The Property Council might be expected to come to similar conclusions, given its local knowledge, but instead it finds Canberra to be Australia's most livable city, ahead of Adelaide, Hobart, Melbourne, Brisbane, Newcastle, Wollongong, Sydney, Perth and Darwin.

There's nothing much wrong with the methodology of each survey and probably nothing much wrong with the scores assigned each city for each attribute. The problems come when they try to add them up. How do you weigh the environment against transport? How do you weigh education against access to shops?

Melser thinks that rather than guessing the weights to work out what city Australians "should" prefer to live in, we should instead look at what Australians actually do.

It's called a "revealed preference" approach. Here's how it would work for Coca-Cola and Pepsi. Instead of assigning scores to the ingredients and adding them up according to a weighting, we look at what Australians actually buy.

If more of us buy Coke than Pepsi (we do) it can be safely assumed we like Coke more. We have "revealed" our preference. There's no need to examine anything.

At RMIT University, Melser got together with Curtin University academic Grace Gao and tried to apply the idea to cities. If all cities were equally good, their reasoning went, there would be no need to pay any Australian a premium to live in one instead of another.

Naturally some employers offer higher wages in some cities to compensate for higher living costs. But any extra premium, over and above what's needed to make up for living costs, would suggest that a city had a low quality of living or something else unpleasant about it that required compensation.

Using census data on incomes and housing costs across 56 different regions they determined that Australia's most pleasant places to live are Sydney's north shore and northern beaches and Sydney's eastern suburbs, followed by inner Melbourne and Melbourne's inner south.

The people who live there might be well-paid, but not so well paid as to overcompensate for the costs of living. They live in inner Sydney and Melbourne because the love it.

It's the same on the Gold Coast, the Sunshine Coast, Coffs Harbour and Warrnambool. People live there because they like it, not for the excess pay.

Australia's least-pleasant locations turn out to be in Perth, the Western Australian outback and the Northern Territory. People are often very well paid there, but in order to keep them there rather than merely because it's expensive.

Canberra is in the middle. It's neither a hardship post that requires special compensation, nor so wildly popular that people put up with high prices in order to live there.

What do the good places have in common? Weatherwise, Melser and Gao find they are not too hot, with plenty of rain. Facilitywise, they have large arts and recreational sectors and lots of restaurants. On the other hand they are not particularly well endowed with shops. Melser and Guo find the bigger the retail sector, the less popular the location.

Their groundbreaking survey suggests you probably prefer to live where you always thought you would prefer to live, and where you've probably been quite rightly telling yourself you can't afford.

In The Age and Sydney Morning Herald

Wednesday, July 08, 2015

What bubble? Houses 30% undervalued, says Reserve official

Far from being overvaluedAustralian house prices are 30 per cent undervalued, the widest such gap in three decades, updated research conducted within the Reserve Bank has found.

The research finds current price expectations neither "unusual" nor "irrational". 

Delivering the preliminary results to a session on housing at the Australian Conference of Economists in Brisbane, and stressing that they should be attributed to him and not the bank, Reserve senior research manager Peter Tulip said that whereas a year ago home prices were "fairly valued", today they are about "30 per cent undervalued".

The change has been brought about by much lower mortgage rates and by changes in bond prices that imply mortgage rates will hug their present historic lows for a further decade.

In the past year, Sydney house prices have climbed 16.2 per cent, Melbourne prices 10.2 per cent and national capital average prices by 9.8 per cent.

But Dr Tulip and his co-author, Ryan Fox, argue that rising prices say nothing about whether home ownership is good value compared with the alternative, which is renting.

"We find that owning a house costs 30 per cent less than renting," Dr Tulip told the session. 

"That is, houses are 30 per cent undervalued.

"Another way of interpreting our results is to look at the expectations underpinning current house prices.

"Our results suggest that those expectations currently look fairly reasonable. They do not show unusual optimism, they do not show irrational exuberance.

"But this hasn't always been the case. Just one year ago when we last published results, we found that houses were fairly valued — that is, the cost of buying was about the same as the cost of renting.

"What has changed since then is that real long-term interest rates have fallen substantially. That fall made housing more attractive relative to renting, despite the increase in prices."

Dr Tulip and his co-researcher compared the cost of renting and buying identical properties, avoiding the common trap of comparing national average rents with national average prices. Because owned homes are typically "bigger and nicer" than rented homes, a lot of the apparent price difference reflects a quality difference.

They calculated the annual cost of a bought home from the purchase price, the transaction cost, the expected mortgage rate and the running and depreciation costs offset by expected capital gains.

The annual cost of owning a home bought in April was likely to be 2.7 per cent of its value. The annual cost of renting the same home was likely to be 3.9 per cent.

"So you can either pay 2.7 per cent of the value of the property to buy, or you can pay 3.9 per cent of the value to rent," Dr Tulip told the conference.

"The undervaluation is 30 per cent.

"It's unusually wide, the widest in at least 30 years. I can take you back further but the data quality deteriorates the further we go back.

"Under our assumptions, owning a home is now more attractive, relative to renting, than it has been at any time in the past 30 years."

The change in the past 12 months is partly the result of this year's two interest rate cuts, which have brought the typical discounted mortgage rate to about 4.6 per cent.

But Dr Tulip said that even more important was the change in bond yields, which meant the market was now expecting little change in interest rates for a decade. A year ago the market had been expecting interest rates to climb.

He has not prepared separate results for each Australian capital.

In The Age and Sydney Morning Herald

Saturday, July 04, 2015

2015-16 Economic Survey. Real estate the only bright spot

First, the good news. None of the BusinessDay forecasting panel expects a recession this coming year. But Australia's terms of trade are set to dive further and wage growth will be so low it won't match inflation, sending real wages backwards.

Unemployment will be contained, house prices will climb for at least another year, business investment will slide much further, the dollar will slip, there will be a chance of another cut in interest rates, and the budget deficit will almost certainly be worse than forecast. It'll be 2014-15 all over again: another year of drifting, without much of an economic or budget recovery.

The 25 forecasters who make up the BusinessDay panel are leaders in the diverse fields of market economics, academia, consultancy and industry economics. Several are former Treasury forecasters. Over time, their average forecasts have proved to be more accurate than those of any individual member.

Whereas this year's budget forecast a lift in economic growth from 2.5 per cent to 2.75 per cent between 2014-15 and 2015-16, on average the panel scarcely expects a lift at all: 2.4 per cent in 2014-15 and 2.5 per cent in 2015-16.

"Outside of housing markets, there isn't a lot that provides optimism," says National Australia Bank's Alan Oster, whose forecasts are close to the average.

Some of the forecasts are dire. Four have growth deteriorating; Europe-based Steve Keen expects growth of just 0.5 per cent; and Monash University's Jakob Madsen expects growth of 1 per cent. It would be easy to dismiss their concerns if each hadn't previously won the title of BusinessDay forecaster of the year (and in Keen's case, several times).

The most optimistic of the growth forecasts is 3.2 per cent, from Stephen Koukoulas. If achieved, it would do no more than return growth to its long-term trend.

None of the panel expects a boom.

On balance, the panel expects the iron ore price to hold fairly steady at $US59 ($78) a tonne. The only extreme pessimist is Saul Eslake, who expects $US45. There's broad agreement that China's economic growth rate will be maintained at around 6.8 per cent, with the United States hanging on to its gains at 2.6 per cent. Only Keen expects particularly low US growth, punting on 1 per cent.

After sliding 12 per cent in the past year, Australia's terms of trade are expected to fall further in 2015-16, slipping another 7.3 per cent. Only Bill Mitchell of Newcastle University is extraordinarily pessimistic, predicting a slump of 22 per cent.  Nigel Stapledon of the University of NSW is alone in expecting a terms of trade rebound, of 5 per cent. 

The slower deterioration in the terms of trade will allow an improvement in nominal gross domestic product. Nominal GDP is what people notice. It's the amount of money produced in the economy rather than the volume of goods and services used to produce it. Nominal GDP grew by just 1.15 per cent in the 12 months to March as export prices fell -- the lowest result since the global financial crisis. The panel sees a recovery to 3.5 per cent, a brighter forecast than the budget's, but still well down on the heady growth of up to 10 per cent during the mining boom.

The extra income won't flow through into wages. They'll climb by less than prices in 2015-16: by 2.4 per cent rather than 2.5 per cent, sending buying power backwards. Only seven members of the panel expect real wages to grow, five expect zero growth, and 12 expect real wages to fall.

Unemployment should remain contained somewhere between 5.8 per cent and 7 per cent, in part because of slow wage growth. If workers are costing their employers less in real terms, they are easier to carry. Economic modeller Renee Fry-McKibbin, in her first appearance in the survey, goes for an unemployment rate of 5.8 per cent. She says Australia is well-placed to benefit from demand in emerging economies as the dollar falls.

But businesses will continue to walk away from investment opportunities. Mining investment will plunge 25 per cent in the year ahead, on top of 15.5 per cent in the year just passed. Non-mining investment will scarcely grow at all. The budget forecast a rebound in non-mining investment of 4 per cent, the long-awaited "rotation" away from mining as a source of growth to something else; the panel is forecasting a lift of just 0.7 per cent, although that average is weighed down by one extremely pessimistic forecast - from Jakob Madsen, who expects a slide of 20 per cent. Without Madsen's forecast, the average forecast growth in non-mining business investment is still pitifully weak: 1.7 per cent. We wouldn't have much of a rotation at all.

Housing investment is the only really bright spot, with the panel forecasting an acceleration in growth to 7.5 per cent in the year ahead. Curiously, only one of the panel expects housing investment to fall -- but that member is Shane Garrett, of the Housing Industry Association, so his views ought to be given weight.

The panel expects Sydney house prices to surge a further 10.3 per cent in 2015-16, and Melbourne prices a further 6.4 per cent. Beyond that, most expect little growth. Six members expect prices to stay flat, and four expect Sydney prices to slump (by somewhere between 5 per cent and 12 per cent from their peak). Nicki Hutley, of Urbis Consulting, has the most restrained forecast for 2015-16: price growth of just 2 per cent in Sydney and 4 per cent in Melbourne. She says what bubbles there are will "deflate rather than burst".

The Reserve Bank's cash rate is, in the panel's view, more likely to stay still than be cut again. On average, they expect a cash rate of 1.9 per cent by this time next year, little changed from the present historic low of 2 per cent. Because the Bank moves in increments of 0.25 points, this means that, on average, the panel is ascribing a 20 per cent probability to another cut, and an 80 per cent probability to rates staying still. Nicki Hutley, Saul Eslake and Chris Caton are the only panel members who expect an increase, to 2.25 per cent in the first half of next year.

Six of the panel expect rate cuts: Bill Mitchell and Jacob Madsen to 1.75 per cent; Su Lin-Ong, David Bassanese and Stephen Anthony to 1.5 per cent; and Steve Keen to 1.25 per cent.

The panel expects the dollar to slide further, in part because the flow of money into the country will slow. The panel sees the 10-year bond rate staying near its present 3 per cent. Saul Eslake has the highest forecast (3.75 per cent) and Paul Bloxham the lowest (2.7 per cent).

On average, the panel expects the Australian dollar to slide from $US0.76 to $US0.725. But there's a wide range in the forecasts, from a dive to $US0.65 (Paul Bloxham and Saul Eslake) to a resurgence to $US0.83 (Stephen Koukoulas). BIS Shrapnel's Richard Robinson says the forecast slide won't be enough: the dollar would need to fall to $US0.70 to help some trade-exposed industries, and to $US0.58 to help others.

The sharemarket is anyone's guess. The central forecast is for the S&P/ASX 200 to inch ahead only 3 per cent to 5755. But at one extreme, Neville Norman and Nigel Stapledon of Melbourne University and the University of NSW expect a jump of 13 per cent to 6300. At the other extreme, Jakob Madsen expects a dive of around 20 per cent to 4500.

As usual, the budget deficit should be worse than officially forecast. This year's budget predicted $35.1 billion; the panel is picking $39 billion. Stephen Koukoulas is the most optimistic, picking suggesting $24 billion partly on the back of a much higher iron ore price. The pessimists say the deficit could blow out to $55 billion or $60 billion. If it does, it'll be because Australia's pay cheque has shrunk with declining terms of trade. It'll be a bad year in which to hold an election.

In The Age and Sydney Morning Herald

Arise Steve Keen, forecaster of the year

What was it Jesus said about a prophet being accepted everywhere but in his home town?

Australian expatriate Steve Keen was by far the most successful of last year's BusinessDay economic forecasters. He did it by being the most pessimistic of the 25, but hardly ever too pessimistic.

None of the others thought our terms of trade would collapse by more than a few per cent. Keen picked 10 per cent. We got 12.25 per cent. The pay cut rocked the budget deficit, but not by as much as most predicted. Keen went for $40 billion. The budget papers say it'll be $41.1 billion.

Wage growth slipped to a new low of just 2.3 per cent. Most of the panel couldn't see it coming, many going for 3 per cent or more. Only Keen and also University of Newcastle economist Bill Mitchell picked 2 per cent. Tom Skladzien, of the Australian Manufacturing Workers Union, deserves an honourable mention as well. With his ear to the ground he picked 2.5 per cent.

The Reserve Bank cut its cash rate twice in response to the slide in national income. None of the bank economists expected it. Only Keen and Mitchell went for a cut, to 2.25 per cent.

The lower rates spurred a sharemarket boom which pushed the S&P/ASX 200 to near 6000 in February before it fell back in May and June to close not too far from where it started at 5459. Keen picked 5500 – far closer than the much higher forecasts of the panellists who didn't see the interest rate cuts coming.

On the bond market the economists employed by banks embarrassed themselves. Instead of climbing as they all expected, Australia's 10-year bond rate slid to an all-time low before edging back up to 3.01. Keen picked 3.5 per cent, the only forecast anywhere near reality.

He says he takes private debt seriously unlike others who treat it as largely irrelevant to economic outcomes, a "consenting act between adults". Given the historically unprecedented levels of private debt worldwide, rates "simply can't rise without causing deleveraging and a crash".

Keen can rightly claim to have foreseen the events in the US which led to the global financial crisis and to have wrongly picked a collapse in Australian house prices in its wake, famously losing a bet and walking from Canberra to Mount Kosciuszko wearing a T-shirt that said: "I was hopelessly wrong about house prices, ask me how.".

Unwanted by the University of Western Sydney, he was snapped by Kingston University in London where he is gaining a reputation as one of Europe's leading economic thinkers.

He didn't get it all right this year. Bill Mitchell (another non-orthodox economist) was more accurate about economic growth, and almost everyone was more accurate about the US economy, expecting something closer to 3 per cent growth than the 1 per cent Keen forecasted. But Keen is doubling down and predicting 1 per cent again this year.

There's a chance he knows what he is doing. It's the third time he has won the title of BusinessDay forecaster of the year.

In The Age and Sydney Morning Herald