Friday, June 30, 2017

2017-18 Economic Survey. Flat shares, housing, income. The year of muddling through

The economy will be too weak to justify a rate rise in the year ahead as growth falls short of targets, the dollar sinks, housing investment and home prices stall and the sharemarket treads water.

The exclusive financial year forecasts from the BusinessDay Scope forecasting panel are predicated on continued strong growth in China, an improvement in the US, a further decline in the iron ore price, and a slight contraction in Australia's terms of trade.

Approaching its 40th year, the survey is made up of forecasts from 26 leading economists in the diverse fields of financial markets, academia, consultancy and industry. Over time its average predictions have proved to be more accurate than those of any of its individual members.

This year, for the first time, the panel has been asked to assign a probability to a conventionally defined recession. The average probability assigned to two consecutive quarters of negative economic growth during the two years ahead is 21 per cent. Panel members warn that the probability would increase dramatically if economic growth in China slowed or the housing market turned down sharply.

"When a housing market turns, it usually turns quickly," says Paul Dales of Capital Economics. "A much weaker housing market would lead to much weaker economic growth."

Home prices

After soaring an unexpected 11 per cent in the 12 months to May (probably less in the year to June when the figures are released on Monday) the CoreLogic measures of Sydney and Melbourne home prices are expected to go nowhere much in 2017-18, inching ahead by just 3.3 and 2.2 per cent.

Several panel members including Nicki Hutley of Urbis Consulting, Richard Robinson of BIS Oxford Economics, Stephen Koukoulas and Steve Keen expect house prices to sink. Stephen Anthony expects them to fall 10 per cent in Melbourne but to rise 5 per cent in Sydney.

Previously prescient forecasters including Renee Fry-McKibbin and Bill Mitchell expect further increases of 10 and 9 per cent.

After soaring 10 per cent in 2015-16 and 4.5 per cent in 2016-17, housing investment is expected to stall in 2017-18, climbing just 0.2 per cent. But the average forecast disguises a wide range. Hutley and Anthony expect slides of 4.9 and 10 per cent. Jakob Madsen and Fry-McKibbin expect an acceleration to growth of 7 per cent.

Business investment

The panel broadly agrees with the government's assessment that the worst is over. After tumbling 21 per cent in 2016-17, the panel expects mining investment to fall a further 12 per cent as predicted in the budget.

Non-mining investment is expected to grow by 3.3 per cent, rather than the forecast 4.5 per cent. Several of the panel are much more optimistic.

Margaret McKenzie of the ACTU expects growth of 10 per cent, Richard Yetsenga of the ANZ expects 7.4 per cent, and Alan Oster and Richard Robinson expect 6.5 per cent.

Economic growth

With little chance of enough extra investment to boost economic growth, and weaker than budgeted growth in household spending of 2.3 per cent, GDP is expected to grow by a below-trend 2.4 per cent rather than the budgeted 2.75 per cent. Only Paul Bloxham of HSBC expects particularly strong economic growth, of 3.4 per cent.

The more important measure of nominal GDP growth (income growth unadjusted for prices) is expected to slide from an outsized 6 per cent in 2016-17 to 3.7 per cent as the impact of higher minerals prices wears off.

Partly because nominal GDP is what drives budget revenue through company profits and bracket creep, the panel expect a worse than budgeted deficit, of $34.6 billion rather than $29 billion.

The best measure of overall living standards, real net disposable income per capita, is expected to grow just 1.8 per cent after growing by around 4 per cent in 2016-17.

Only Shane Oliver, Renee Fry-McKibbin, Besa Deda and Neville Norman are particularly optimistic about living standards, each predicting continued growth of around 4 per cent.

Several of the panel expect growth in living standards of close to zero (for which there are precedents – living standards went backwards in 2014-15).

Jakob Madsen expects growth of just 0.5 per cent, Michael Blythe expects 0.4 per cent, and Nicki Hutley expects zero, and Steve Keen a decline in living standards of 2 per cent.

The forecasts are predicated on economic growth in China near the Chinese target of 6.5 per cent and a pick-up in US growth to 2.1 per cent.

Wages and inflation

While broadly backing the government's forecast of an inflation rate close to 2 per cent, most of the panel can't see wage growth approaching the 2.5 per cent predicted in the budget.

Several of the panel expect it to slide further to 1.7 per cent (Margaret McKenzie) and 1.5 per cent and less (Steve Keen and Bill Mitchell) Only Julie Toth, Michael Blythe and Paul Bloxham expect the same sort of pick-up as the government. Bloxham expects 2.7 per cent.


The unemployment rate, also closely watched by the Reserve Bank, will stay close to the present 5.7 per cent.

Only Michael Blythe and Paul Bloxham expect unemployment rates substantially lower, at 5.4 and 5.3 per cent.

More pessimistic than the government forecast of 5.75 per cent are Stephen Anthony and Stephen Koukoulas who expect 6.2 per cent, and Steve Keen who expects 7 per cent.


With little to celebrate about economic growth, the Reserve Bank is most unlikely to lift interest rates, in the view of the panel. Twenty-three of the 26 expect no change this year, and 16 expect no change by June 2018.

Of those that do expect a change by June, four expect increases, and four expect decreases. The most extreme forecasts are from Steve Keen (a cut in the cash rate from 1.5 per cent to 1 per cent) and Mardi Dungey and Neville Norman, who expect increases to 2 and 2.25 per cent.

The panel is expecting a lift in the 10-year bond rate from 2.5 to 2.8 per cent in line with better conditions overseas.


The Australian dollar is expected to fall from its present 77 US cents to around 72 US cents without the stimulus of rising commodity prices and the 200 is expected to climb just 1.8 per cent to 5833 absent further growth in minerals prices.

The most optimistic forecasts for the sharemarket are further growth of 8 per cent to near 6200 (Michael Blythe and David Bassanese). The most pessimistic is a slide of 12 per cent to 5500 (Steven Anthony and Steve Keen).

Only two of our panel expect the dollar to rise; Blythe (to 78 US cents) and Margaret McKenzie (to 80 US cents). Keen and Koukoulas expect a slide to 65 US cents.


The panel expects a further fall in the iron ore price from around $US65 a tonne to near $US58, an outcome that would leave the price about where it was before the extraordinary rise to $US89 in the last part of last year and the first part of this year.

Some expect a return to around $US80, among them Neville Norman, Margaret McKenzie and Jacob Madsen. The most pessimistic, Stephen Anthony, expects the iron ore price to fall to $US40.

The decline will unwind 2.8 points of the remarkable 16 per cent jump in Australia's terms of trade in the financial year just ended. The result will be a current account deficit of around $32 billion, the lowest since before the mining booms began in 2003.

In The Age and Sydney Morning Herald

One in five chance of a recession, says panel

Australia faces a "small but non-zero" chance of a recession in the next two years, according to the BusinessDay expert forecasting panel, with a sharp fall in property prices or a weakening in the Chinese economy most likely to bring it on.

"Without strong drivers and facing significant risks – headwinds from housing sector indebtedness, property price adjustments and a slowing China – and in the absence of strong leadership from Canberra – it is much more likely that growth will falter," Industry Super chief economist Stephen Anthony says.

Anthony assigns a 50 per cent probability to a conventionally defined recession within two years, the highest after expatriate Australian Steve Keen at Kingston University, in London, who puts the probability at 100 per cent.

Each of the 26 members of the Scope forecasting panel answered the question, including the chief economists from each of the big four banks.

The answers will allow them to be held accountable for their forecasts in two years' time in a way that spot forecasts of things such as the exact price of the dollar do not.

The Commonwealth Bank assigns a 20 per cent probability to a recession, Westpac and National Australia Bank a 15 per cent probability, and ANZ a 10 per cent probability.

The average across the panel is 21 per cent, a likelihood several members described as "low".

"Despite the downside risks, there are still a range of monetary and fiscal policies that could be rapidly deployed," says Nicki Hutley who picked a probability of 20 per cent. "That said, there are a number of 'grey ducks' that should never be discounted such as a China stumble, Trump impeachment, severe terror attack or climate-related shock."

A recession is conventionally defined as two consecutive quarters of negative economic growth, something Australia avoided during the global financial crisis and last experienced during 1991. Alan Oster, of National Australia Bank, believes disruptions to exports caused by bad weather could be creating a recession right now.

"Negative growth in GDP is looking possible for the second quarter, meaning that any delays in ramping up exports or any other unexpected shocks to the economy could more easily trigger a technical recession this year," he says, while pointing out that growth should rebound quickly.

"Further out, the economy will be losing significant growth drivers (mining exports hit full capacity, house prices flatten, housing construction cools etc) which again puts the economy at greater risk of recession," he says.

"Beyond that most estimates suggest slower productivity and potential growth in Australia going forward, making the economy even more vulnerable than it was previously."

When riding a slow-moving bicycle you are more likely to fall off.

Sally Auld, of JPMorgan, (who picked a 20 per cent probability) believes that much lower interest rates and a lower dollar can be deployed to enable Australia to ride out a storm.

Guay Lim, of the Melbourne Institute, believes it would be up to the government using tax and spending measures, because the Reserve Bank is unlikely to want to cut its cash rate further.

Bill Mitchell, of Newcastle University (who picked 40 per cent) distinguishes between a "technical" and a full-blown recession with colossal unemployment. He says if "push comes to shove" the Turnbull government will spend big, just as the Rudd government did, to avoid full-blown recession.

Su-Lin Ong, of RBC Capital Markets, believes there's plenty of room for a much lower dollar to do the trick. "It is only currently around the long run post-float average at $US0.75," she says. "The currency can bear the brunt of adjustment and trade much lower."

St George Bank's Besa Deda puts the probability at 10 per cent.

"We have already seen some tentative signs that non-mining investment has turned a corner, while the drag from mining investment has largely run its course," she says. "That, combined with improved profits and shrinking spare capacity, suggests to us that business investment should continue to improve. Consumer spending may be more of a challenge."

"If achieved, stronger real wage growth will certainly help, but record levels of household debt and expectations for a more subdued housing market could pose significant headwinds."

The panel will be asked the question each six months to build up a long-term profile of views about a recession.

In The Age and Sydney Morning Herald

Why 2016-17 was the year they all got wrong

No one expected the financial year just finished.

Just months in the coal price doubled. The iron ore price jumped almost 70 per cent.

Twelve of our panel had expected Australia's terms of trade to slide during 2016-17. Only five had expected them to rise, and only one predicted a substantial increase: Stephen Koukoulas, who predicted 5 per cent.

At year's end it looks as if our terms of trade climbed an exceptional 16.5 per cent – an extraordinary indication of just how unlikely 2016-17 was.

Everything that flowed from that remarkable change made most of our forecasters wrong about a good deal else.

Australia's current account deficit as good as vanished, sliding to a 40-year low of just 1.5 per cent of GDP. The panel had predicted double or quadruple that, with forecasts of 3.2 to 6 per cent.

The Australian dollar climbed to 77 US cents instead of sliding to 70¢ as predicted by the panel. The Commonwealth Bank's Michael Blythe got the outcome closest to right, predicting 75¢ along with economic modellers Janine Dixon and Renee Fry-McKibbin who predicted 74¢.

Powered by high minerals prices, the S&P/ASX 200 closed the financial year up 9 per cent. The panel had predicted 7 per cent.

The boost in national income pushed up nominal GDP 6 per cent, twice the 3 per cent predicted by the panel. Victoria's University's Janine Dixon came closest, picking 4.9 per cent.

The best measure of living standards, real net disposable income per capita, appears to have closed the year up 4 per cent, a big improvement on 2015-16 in which it actually fell and on 2014-15 in which it didn't move. The result – way in excess of the forecast range of minus 3 per cent to plus 1 per cent – is the biggest increase in living standards since the mining boom in 2011. Stephen Koukoulas had the highest forecast, an increase of 1 per cent, an indication of how much the panel was caught unawares.

Greater profits led to greater investment. Eight of our panel had expected non-mining business investment to fall. Instead it climbed 1.5 per cent. Housing investment jumped 4.5 per cent. Two of our panel had expected it to fall, including Shane Garrett of the Housing Industry Association who predicted a fall of 4 per cent.

The further jump in home prices completely surprised the panel. Three of our panel expected the CoreLogic index to fall. The central forecast was for an increase of just 3.6 in Sydney and 4.2 per cent in Melbourne. The latest figures, for May, point to increases of 11.1 per cent and 11.5 per cent. There will probably be some slippage in June making the most successful forecasts those of Fry-McKibbin and Neville Norman who picked 9 to 10 per cent.

But it wasn't all better than expected. Wage growth was much weaker, meaning most of the extra national income was captured as profits rather than trickling down. Instead of climbing by the predicted 2.3 per cent, wages are growing at an annual pace of just 1.9 per cent, the lowest in records dating back to the 1990s.

Overall economic growth (growth with the effects of higher resource prices excluded) looks like ending the financial year at just 1.75 per cent; the least since the early 1990s recession, meaning that were it not for the jump in resource prices, the economy would have been weak. The panel had predicted growth of 2.6 per cent.

Stephen Anthony and Bill Evans got wage growth exactly right, picking 1.9 per cent, and Bill Mitchell and Neville Norman came closest on overall economic growth, picking 2 per cent, which was the lowest of all the forecasts bar Steve Keen's, which was 1 per cent.

Naturally, no one takes home the trophy for forecaster of the year. Those who got Australia's appallingly low rate of economic growth right failed to see the resurgence in resource prices. Those who guessed at the resurgence (and Fry-McKibbin was closest) thought economic growth would be much stronger than it turned out to be.

In The Age and Sydney Morning Herald