Saturday, January 30, 2016

2016 Economic Survey: Share market flat all year, economic outlook bleak



The Reserve Bank board will confront a bleak economic outlook when it meets for the first time this year on Tuesday.

In 2016 the forecasting panel for BusinessDay's Scope economic survey is expecting below-trend economic growth, a further collapse in mining investment, next-to-no lift in other investment and a lacklustre year on the sharemarket.

It believes Australia's unemployment rate will stall rather than improve, wage growth will barely match inflation, US economic growth will remain weak, Chinese growth will weaken and the price of iron ore will stay low while Australia's terms of trade weaken.

In other words, it is forecasting a year pretty much like the one we've just had. Except that this time the Reserve Bank won't cut rates.

The panel concedes there's a small chance of an cut (its average forecast is for a December cash rate of 1.9 per cent) but not enough of a chance to force the Bank to cut by a standard increment, from 2 to 1.75 per cent.

It'll be a muddling-through kind of year, with little to drive growth. Housing investment, which did the job last year, jumping 10 per cent, will this year climb just 4.1 per cent. Home prices, which last year soared 11.5 per cent in Sydney and 11.2 per cent in Melbourne, will this year climb just 2 and 2.8 per cent.

The good news is that none of the panel expects home prices to collapse. The most pessimistic forecast comes from Stephen Koukoulas of Market Economics, who expects slides of 6 and 7 per cent; the most optimistic comes from Renee Fry-McKibbin at the Australian National University who expects gains of 10 and 9 per cent.

Made up of 26 leading economists from financial markets, academia, consultancy and industry, the BusinessDay panel's forecasts have over time proven to be more accurate than those of any of its members.

Of necessity they assume away unexpected events, as do the forecasts of the Treasury and the Reserve Bank. But as with the official forecasts, it would be fair to say the risks are weighted to the downside.

"For iron ore in particular, a sharper slowdown in global steel output (especially in China) could potentially drive iron ore prices closer to US$30 per tonne – roughly the breakeven prices for major Australian miners – compared with our current forecast of US$42 per tonne," writes the National Australia Bank's Alan Oster.

This year's survey is unusual in hosting something of a write-in protest. Five of the panel said they didn't believe China's official economic growth figure. They produced forecasts for what China would say the figure was, but thought the actual figure would be much less.

"Actual GDP is likely to be lower, but not reported," was how Nicki Hutley of Urbis Consulting put it.

The panel expects reported Chinese growth to remain near the 7 per cent target at 6.4 per cent, but it doesn't expect it to necessarily support Australian exports...

"China's economy is, at best, transitioning away from relying on commodity-intensive manufacturing and heavy industry to drive its growth, and at worst could experience a prolonged depression of these industries," writes the ANZ's Warren Hogan. "So the outlook for commodity markets remains weak, with stability in prices and continued growth in volumes looking increasingly like an optimistic view."

On balance the panel expects the iron ore price to end the year near where it started at US$40 a tonne, but the range of forecasts is wide, from US$33 to US$58 a tonne. Even if the price does hold up, the panel expects other export prices to fall, pushing Australia's terms of trade down another 4.7 per cent.

Mining investment will collapse a further 20 per cent as existing projects wind up, and the much anticipated boom in non-mining business investment will be postponed for another year. The panel expects non-mining investment to climb by 1.2 per cent, nowhere near enough to take up the slack.

And housing won't either. The authorities have been successful in their attempts to cool the boom in investor borrowing.

All up, the panel expects economic growth of just 2.5 per cent this year, much less than the 3 per cent expected by the Reserve Bank and also less than the 2.75 per cent the treasury believes is Australia's long-run potential.

As a result unemployment will stay roughly steady at 5.9 per cent, and wage growth will remain barely noticeable at 2.4 per cent, just a touch above the underlying inflation rate of 2.3 per cent.

Household spending will continue to grow at about the rate it has been, 2.6 per cent, perhaps funded by a further fall in the household saving. While a long way short of the 4 and 5 per cent growth rate in household spending achieved in the mining booms, its an improvement on the anemic growth of less than 2 per cent experienced during much of 2012.

Nominal GDP – the measure that matters for budget revenue – will also hold up in the view of the panel, growing by 3.4 per cent, up from this year's 2.2 per cent. But again the range of forecasts is wide, from just 1.5 per cent (Steve Keen) to 5.2 (Paul Bloxham of HSBC).

The panel broadly accepts the government's budget deficit forecasts, agreeing with it about 2015-16 and expecting a $3.6 billion bigger deficit in 2016-17. But forecasts for the second year range from a deficit of $17 billion to $60 billion indicating considerable uncertainty about how much the government will be able to tighten the budget in an election year.

Mardi Dungey of the University of Tasmania believes there might be an economic limit to how much tightening the economy can bear brought on by the tax white paper.

"There will be an effective tightening for consumers due to announcement effects and anticipation of an increase in tax collection via either a broadened or increased goods and services tax collection," she writes.

The panel expects the share market to grow hardly at all, the ASX 200 doing little more than recovering its January losses in the first half of the year and then closing up a mere one half of one per cent at 5325.

Weighing on the market will be a weak Australian economy and an equally weak American economy. The panel expects US growth of just 2.5 per cent throughout 2016. The most optimistic forecasts are 3 per cent (Nicki Hutley and Su-Lin Ong). The most pessimistic is 1 per cent (Steve Keen).

Higher US interest rates would mean a much-needed lower Australian dollar, but the weak US forecasts suggest it might not happen quickly. The forecasts for the Australian dollar centre around 69 US cents, roughly where it is now.

The government's 10-year bond rate should remain low at 3.14 per cent. Without a sustained lift in global interest rates, long-term rates will remain low.

The original version of this story wrongly attributed the lowest forecast for nominal GDP growth to Dr Guay Lim of the Melbourne Institute. The forecast was Steve Keen's. Dr Lim and her team at forecast nominal GDP growth of 3.8 per cent.

In The Age and Sydney Morning Herald



BusinessDay Economic Survey: Stephen Anthony shines in a year of gloom

Asked what would happen to the price of iron ore this time last year, our panel said "nothing much". It would remain roughly steady around US$72 a tonne.

Instead it collapsed, plummeting to US$41.

In fact, 2015 was the year our panel got spectacularly and unusually wrong.

Was the Reserve Bank going to cut interest rates? Not at all, said most of our 25-person panel. Instead, starting just days after the forecasts were published, the Reserve Bank cut its cash rate twice in a matter of months. By May it was 2 per cent. Only one of the panelists predicted it. He was Stephen Anthony, now with Industry Super.

Dr Anthony also came the closest to picking the fresh collapse in the price of iron ore. He wasn't very close, he predicted an iron ore price of US$55 rather than US$41. But he was closer than any of the rest. All the others went for an iron ore price of US$60 or even more. Some tipped a rise to US$80.

Until mid-last year the director of forecasting at his Canberra consultancy Macroeconomics, Anthony is a former treasury economic modeller who feeds scenarios to computer models that give him consistent economic and budget forecasts.

The scenario he chose was the one outlined in Ross Garnaut's book Dog Days: turmoil in China and much weaker demand for Australia's big exports.

"If you forecast the right story, if you back the right horse, you'll do well pretty much across the board," he says. "It's when you have the wrong sense of where we are at as a macroeconomy. That's when you a have problem."

His sense is that much weaker demand for Australia's exports will mean weaker incomes, weaker budget revenue and much weaker mining investment. He doesn't think it's over, and he doesn't rule out a recession.

"Mining investment was 5 per cent of GDP. It's going to fall to around 1 per cent. That means the economy is transitioning to something else, but we are not yet sure what it is," he says.

One of Anthony's forecasts was too gloomy. He expected an unemployment rate of 7 per cent. Instead it fell to 5.8 per cent. Anthony thinks employment is switching away from high wage jobs to lower wage jobs, something he didn't expect.

In The Age and Sydney Morning Herald