Saturday, June 25, 2016

2016-17 Economic Survey. Low rates, weak economy ahead

It'll be a year of weaker growth and not enough jobs.

The mid-year Scope BusinessDay economic survey predicts economic growth of just 2.6 per cent in 2016-17, down from the 3.1 trumpeted by the Prime Minister in the election campaign.

The iron ore price should slide from $US60 a tonne at the time of the last budget to $US48. Non-mining business investment, which was budgeted to grow quickly, should scarcely grow at all.

Nominal GDP – the measure that drives tax revenue – would grow far more weakly than forecast, and living standards will slide for the third consecutive year.

The Reserve Bank will most probably cut its cash rate one more time. Four of the 23-person panel expect at least two cuts and two an increase.

The Scope BusinessDay economic survey is Australia's longest running. For the past 30 years it has aggregated the views of financial market economists, academics and industry economists to produce a window into the year ahead and a record against which their predictions can be judged.

Over time its forecasts have proved to be more accurate than those of any of its individual members.

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The official 3.1 per cent economic growth rate embraced by Malcolm Turnbull with the words "so far, so good" won't continue.

Only two of the panel expect that much growth in the coming financial year, and none expect more. Most expect much lower growth close to the budget forecast of 2.5 per cent.

Three expect just 2 or 1 per cent.

On balance the panel expects no lift in growth in either the US, China or the world as measured by the International Monetary Fund.

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After Brexit, it sees a Trump presidency as the biggest downside risk.

"A Trump victory would be contractionary for global growth in the short term due to uncertainty," says former BusinessDay forecaster of the year Stephen Anthony. "It should then be broadly neutral as policy gridlock ensues."

BT Financial Group chief economist Chris Caton has two words: "God forbid!"

"We can only hope that he is not as mad as he seems, and that he will be restrained by Congress," he adds.

"In that case, the market impact will be large but temporary and the economic impact will be slight."

Saul Eslake fears US bond holders will "take fright" pushing up US rates, weakening the US economy and the dollar, and putting unwelcome upward pressure on Australia's dollar.

Global uncertainty has already pushed Australia's 10-year bond rate to a record low of 2 per cent. On balance the panel expects no further falls, and a lift to a still-low 2.4 per cent.

Sensitivity analysis included in the budget suggests a slide in the iron ore price to $US48 a tonne would cut more than $4 billion from government revenue in the first year. But the central forecast conceals a wide range.

David Bassanese and Bill Mitchell expect the price to slide to as little as $US35 a tonne. Mardi Dungey and Chris Caton expect a rebound to $US60 a tonne. Stephen Koukoulas expects $US70 and Neville Norman expects $US78.

On balance the panel expects Australia's terms of trade to slip a further 1.6 per cent.


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Business investment should continue to slide. Mining investment is forecast to plummet a further 24 per cent after sliding 27 per cent in 2015-16 and 17 per cent in 2014-15.

That's in line with the budget forecast. But whereas the budget expects other non-mining investment to bounce back, climbing 3.5 per cent, on balance the panel expects next to no improvement, although its range of forecasts is wide, from a fall of 4.5 per cent to an increase of 5 per cent.

Julie Toth, of the Australian Industry Group, whose members would need to make the investments, predicts a fall of 2.5 per cent.

The panel expects nominal GDP to grow by just 3 per cent, well short of the 4.25 per cent on which the official budget deficit forecast depends.

One forecaster, Steve Keen, expects nominal GDP to fall. Three, Guay Lim, Richard Yetsenga and Janine Dixon, expect faster growth than does the budget, of 4.5 to 4.9 per cent.

The budget papers predict an improvement in the deficit from $39.9 billion in 2015-16 to $37.1 billion in 2016-17. The panel doesn't believe it. Its median forecast is for a deficit of $40 billion in both years. (The average forecast has been pushed higher by one extraordinary forecast of $70 billion, made on the grounds that the government will have to fight off a recession.)

Real net national disposable income per capita, regarded by the Bureau of Statistics as the best measure of Australian living standards, has been falling for nine consecutive quarters.

The panel expects it to slide for yet another year, slipping a further 1.7 per cent to be down 5.6 per cent since December 2013 and 8 per cent since the peak of the mining boom in September 2011.

Only two of the panel expect it to get worse. Fourteen expect it to sink.


House price growth is expected to slow.

The panel expects household spending to climb 2.6 per cent in line with budget forecasts as saving rates are wound back.

Housing investment should climb just 2.9 per cent in 2016-17 after climbing 8 per cent in 2015-16.

Sydney and Melbourne home prices should climb much more sedately than in the past year at 3.6 and 4.2 per cent.

The panellist who ought to know the most about home prices, Shane Garrett of the Housing Industry Association, predicts 6.3 and 6.9 per cent.

Economic modeller Mardi Dungey, of the University of Tasmania, expects the highest price growth, a further 12 per cent in each city.

The "Doctor Doom" of house prices, Steve Keen is predicting falls of 2 and 4 per cent, but he is not alone. Stephen Koukoulas expects falls in both cities, Jakob Madsen expects a fall in Sydney and David Bassanese in Melbourne.

Inflation should climb up from its present extraordinary low of 1.3 per cent to 1.9 per cent, which is just below the bottom of the Reserve Bank's target band, but it'll probably take another cut in the Reserve Bank cash rate to do it.

Most of the panel expect a cut from 1.75 to 1.5 per cent by December. One (Saul Eslake) expects it to be reversed in the first half of next year.

Five expect deeper cuts; Shane Oliver, Michael Blythe and Tom Skladzien to 1.25 per cent and Stephen Anthony and Steve Keen to 1 per cent. Two, Mardi Dungey and Neville Norman expect the RBA Bank to aggressively push up the cash rate, to 2.5 per cent and 3.25 per cent.


The ASX looks to hit 6000 before 2017.

Forecasts for the Australian dollar follow those for the cash rate. Stephen Koukoulas expects the dollar to climb to US79 cents by December and to US83 cents by the middle of next year.

He thinks the Reserve Bank won't need to move at all during that time as the US consolidates its economic recovery, China stabilises and Europe starts to pull ahead.

It would be good news for the S&P/ASX200 share index, which he sees hitting 6000 by the end of this calendar year and 6260 by June.

"Locally, the dollar at US75 cents plus or minus 5 per cent is providing a bit of a fillip for exporters and import-competing industries," he says.

Toward the pessimistic end of the scale is trade union economist Tom Skladzien who sees the Aussie at US67 cents by June and the share index down to 5500.

"The Australian economy and, I'd argue, a lot of other economies are just cruising along, not being really boosted by anything and performing under capacity," he says.

The average forecasts for dollar and the S&P/ASX200 share index by June are US70 cents, a decline of 8 per cent, and 5605, an increase of 6 per cent.


Australia's jobless level has hovered at 5.7 per cent for the past three months.

The range of forecasts for the unemployment rate is unusually narrow, almost all near the present 5.7 per cent, where there would be just enough jobs created to absorb the new entrants to the labour force but no more.

Wage growth, although low at 2.3 per cent, would be comfortably ahead of inflation at 1.9 per cent.

In The Age and Sydney Morning Herald

Cut negative gearing, not company tax, economists say

If Australia's top economists were deciding the election, they'd vote for Labor's cuts to negative gearing and against the Coalition's cuts to company tax.

Of the 23 leading economists polled for the Scope BusinessDay Economic Survey, those that answered the questions about tax backed Labor's plan 10 to three and opposed the Coalition's plan 10 to six.

The key objection to the Coalition's company tax cuts was that they would have to be funded, most likely from bracket creep, higher taxes, or cuts to government spending. Estimates of the ongoing cost range from $9 billion to $13 billion per year.

"The money should come from reducing superannuation tax breaks, negative gearing tax breaks and other forms of upper class welfare," said BIS Shrapnel chief forecaster Richard Robinson.

"On balance, it is not a good idea. There are very little or dubious benefits for such a large outlay that could be better used to reduce the deficit. If higher investment is the aim, it's better to use targeted investment incentives, R&D tax breaks, and improved workforce skills via higher education spending."

Industry Super chief economist Stephen Anthony said much of the money should be found by paring back corporate welfare, but he said even if it was the tax system would become more heavily reliant on personal income tax which did "not sound efficiency improving".

Saul Eslake said evidence from the OECD showed the biggest bang for the buck came from cutting taxes for new rather than existing businesses, "which would be cheaper than a general company tax cut since there are by definition fewer new businesses."

A supporter of a cut, Monash University researcher Jakob Madsen, said it should not apply to mining companies, builders or property developers and banks because they would "just pocket the extra profit without creating jobs".

The results echo those of a survey conducted by the Economic Society of Australia this week which found that Australia would receive a bigger long run benefit from spending on education than spending the same amount cutting company tax.

Supporters of Labor's plan to wind back negative gearing and capital gains tax concessions generally agreed with the proposition that they would result in lower house prices than otherwise, but said that was a good thing.

"Halving the capital gains discount on housing investment returns is overdue and has arguably been one of the worst policies enacted under Howard-Costello," said BIS Shrapnel's Richard Robinson.

In The Age and Sydney Morning Herald

Scope BusinessDay Economic Survey: How they got 2015-16 wrong

There's an awful lot our panel got wrong about 2015-16.

Like the Treasury, it expected creditable growth in nominal GDP of 3.5 per cent, enough to lift profits and company tax and eat into the deficit.

Instead it languished at 2.5 per cent, less than even the most dire of the panel's pessimists predicted.

Like the Treasury, the panel hadn't expected the iron ore price to fall as far as it did. It predicted a ASX200 share index of around 5800. Instead it'll be closer to 5200.

Australia looks like collecting less company tax in 2015-16 than in any year since 2010-11.

While right about mining investment (the panel expected a slide of 25 per cent) like Treasury it expected a bounce in non-mining investment. Instead non-mining investment slid a further 2 per cent.

This year Treasury has pushed out its forecast of a recovery by another financial year. Our panel hasn't. It's expecting next to no growth in the next 12 months, having learnt from history.

Like just about everyone, it got inflation spectacularly wrong. Its average forecast for underlying inflation was 2.5 per cent, right in the middle of the Reserve Bank's target band.

Instead the underlying rate slid to 1.55 per cent and the headline rate to 1.3 per cent. Although still far too high, Neville Norman came closest, expecting 2.1 and 1.8 per cent.

But he was wrong about other things, expecting far too high nominal GDP growth, just as Steve Keen who was right about non-mining investment expected far too high inflation.

This year there's no award for the best forecaster. None of our panel emerged looking good.

The 10-year bond rate looks like ending the financial year below 2 per cent, an all-time low. Our panel had expected it to climb rather than fall.

This year there’s no award for the best forecaster. None of our panel emerged looking good.

The UK bond rate is close to 1 per cent and the German rate is less than zero.

It was also more or less right on the Reserve Bank cash rate, on balance expecting no change, which is how it would have turned out had the board not sneaked in a half-hearted cut on budget day.

On some measures it was too pessimistic. Only Stephen Koukoulas picked a headline GDP growth rate of more that 3 per cent.

Most of the forecasts has a "2" in front of them and some had a "1". It was also far too pessimistic on jobs. Most of the panel expected the unemployment rate to climb rather than fall.

Only Renee Fry-McKibbin and Shane Garrett picked something close to 5.7 per cent.

The contours of the panel's mistakes tell us much about the way the economy surprised us all in 2015-16. It was better on the surface, worse underneath.

In The Age and Sydney Morning Herald