Tuesday, January 28, 2020

2020 survey: no lift in wage growth, no lift in economic growth and no progress on unemployment in year of low expectations

2020 is shaping up as a dismal year for the economy, with no progress on many of the key measures that matter for Australians.

Unemployment will stay above 5% and probably rise rather than fall.

Economic growth will continue to have a “1” in front of it, instead of the “2” or “3” that used to be common, and living standards will grow more slowly.

Wage growth, forecast in the budget to climb to 3%, will instead remain stuck near 2.2%, where it has been for half a decade.


Read more: We asked 13 economists how to fix things. All back the RBA governor over the treasurer


Those are the central forecasts of a panel of 24 leading economists from 15 universities in six states assembled by The Conversation to review the year ahead, a year they expect to be marked by one only more interest rate cut, more modest growth in house prices, and a return to slower growth in the share market.

The panel comprises macroeconomists, economic modellers, former Treasury, IMF, OECD, Reserve Bank and financial market economists, and a former member of the Reserve Bank board. Combined, their forecasts are more likely to be correct than those of any individual member. One-third are women.

They expect the long-promised budget surplus to all but disappear as a result of responses to the bushfires and weaker-than-predicted economic growth.

Economic growth

The Treasury believes the Australian economy is capable of growing at a sustained annual pace of 2.7%, but it hasn’t grown that fast since mid-2018. Growth slipped below 2% in March 2019 and hasn’t recovered. It now has been below 2% for three consecutive quarters, the longest period since the global financial crisis.

The panel’s central forecast is for economic growth to stay at or below 2% for at least another year, producing the longest period of low economic growth since the early 1990s recession. The average forecast for the year to December is 1.9%.

Panellist Saul Eslake says it will be the result of persistently slow growth in household disposable incomes, reflecting “very slow growth in real wages, the increasing proportion of gross income absorbed by tax, and weakness in property income (interest and rent) as well as (at the margin) the impact of the drought on farm incomes”.

It will be domestic rather than overseas conditions that hold back Australian growth. US economic growth is expected to remain little changed at 2.1% notwithstanding trade friction with China, and China’s officially reported growth is expected to ease back only slightly from 6% to 5.8%.



Living standards

One of the best measures of overall living standards (the one the Reserve Bank watches) is real net national disposable income per capita, which takes better account of buying power than gross domestic product does. In the year to September it climbed an unusual 3.3%, pushed up by a resurgence in iron ore export prices.

The iron ore price has since slid from US$120 a tonne to around US$90 a tonne, and the panel’s average forecast is for it to fall further.

As a result it expects growth in living standards to slow to 2.4% in 2020, a result that will still be better than between 2012 and 2016 when a dive in export prices sent it backwards.


Read more: Why we've the weakest economy since the global financial crisis, with few clear ways out


Growth in nominal GDP, the raw total unadjusted for inflation, is also expected to slow, slipping from 5.4% to 4.4% as export prices weaken, producing a decline in revenue growth the government has already factored in to the budget.

The unemployment rate is expected to end the year near the top of the 5%-to-5.5% band it has been stuck in for the past two years, rather than falling to the 5% forecast in the budget or towards the 4.5% the Reserve Bank believes is possible.

Only one of the panel, Warren Hogan, expects the unemployment rate to end the year below 5%.



Wages and prices

The panel’s central forecast is for inflation to remain below the bottom of the Reserve Bank’s 2-3% target band, where it has been for most of the past five years.

One panellist, Margaret McKenzie, breaks ranks. She expects the drought and bushfires and floods to sharply push up the cost of food and essential items including energy, quickly pushing inflation into the range the authorities have long wanted, but not for the reasons they wanted.

“I don’t think people have thought about it, because there hasn’t been inflation for so long,” she says. “The problem is that the fires are likely to contract an already weak economy, impelling the Reserve Bank to cut interest rates further, even though its inflation targeting regime would tell it not to.”

Wage growth is forecast to be well below the highest inflation forecast and only a little above the central forecast, resulting in continued low real wage growth and seeing the budget miss its wage growth target for the eighth year in a row.



Business

Household spending barely grew in the year to September, inching ahead by a shockingly low 1.2%, the least since the financial crisis, and not enough to account for population growth.

The panel’s central forecast is for a recovery in spending growth to a still-low 2.4%, with spending held back by low consumer confidence and what former Organisation for Economic Co-operation and Development director Adrian Blundell-Wignall calls a “sense that we are living on borrowed time”.


Read more: GDP update: spending dips and saving soars as we stash rather than spend our tax cuts


“China is slowing, bank-financed housing has been pushing the envelope and is very expensive, and the governments have never had a plan for the next phase of sustainable growth,” he says. “This perception of no confidence in the government has not been helped by the bushfire events.”

There are few signs of a recovery in business investment, notwithstanding record-low interest rates.

The panel’s average forecast is for investment by mining and non-mining companies to grow by only 1.7% and 1.9% in 2020, which will represent a turnaround for mining, in which investment fell 11.2% in the year to September.



Markets

Financial markets should provide less support to households in the year ahead, with the ASX 200 share price index expected to climb only 6.4% after soaring 20% in the year just ended.

None of the panellists expect last year’s growth to continue.

The Australian dollar is expected to end the year at 68 US cents, close to where it is at present. The iron ore price is expected to fall to US$75, a smaller slide than was assumed in the budget.



Home prices

Housing investment (homebuilding) is expected to stabilise in 2020, falling only slightly from here on, after sliding 9.6% in the year to September 2019.

Sydney and Melbourne home prices are expected to continue to recover, growing by 5% in 2020.

Panellist Nigel Stapledon says the higher home prices will in time boost perceptions of wealth, opening up the possibility that consumer spending will “surprise on the upside”.



Interest rates and budget

The panel’s central forecast is for only one more cut in the Reserve Bank’s cash rate this year, in the first half, followed by no further cuts in the second half. This would allow the bank to avoid so-called unconventional monetary policy or “quantitative easing” in which it forces down longer-term rates by buying government and private bonds, an option Governor Philip Lowe said it would only resort to after it had cut its cash rate to 0.25%.

The single cut would take the cash rate to an all-time low of 0.5%. In anticipation the ANZ cut its online saver account rate from 0.1% to 0.05% on Thursday.


Read more: Now we know. The Reserve Bank has spelled out what it will do when rates approach zero


The cut could come as soon as next week when the board holds its first meeting for the year on February 4. Governor Lowe has scheduled an address to the National Press Club for the following day.

Most of the panel think quantitative easing will not be needed and many question its effectiveness, saying the government could achieve much more by fully abandoning its commitment to surplus in order to stimulate the economy.

The panel expects the government’s 10-year bond rate to remain historically low at 1.3%. That makes it about as cheap as it has ever been for the government to borrow for worthwhile purposes.



Treasurer Josh Frydenberg has abandoned his absolute commitment to return the budget to surplus this financial year, saying his first priority is “meeting the human cost of the bushfires”.

The 2019-20 surplus was forecast at A$7.1 billion in the May budget and then downgraded to $5 billion in the December update.

The panel’s average forecast is for a bushfire-ravaged $2.2 billion.



Most of the panel believe that with good management the government can avoid a recession for another two years, propelling the Australia economy into what will be its 30th straight year of expansion.

On average they assign a 27% probability to a recession within the next two years, down from their average forecast of 29% in June.

Several point out that, whereas the main risks to continued growth come from overseas, China appears to be managing its slowing economy better than expected, although the emergency triggered by the new and deadly Wuhan coronavirus might change that.


Read more: Their biggest challenge? Avoiding a recession


Among those who do fear a home-bred recession is Julie Toth who has lifted her estimate of the likelihood of a recession from 25% to 50%, saying growth is already so weak that it won’t take much to send it backwards.

“The bushfire disaster presents the real and immediate possibility of two quarters of negative growth for the fourth quarter of 2019 and the first quarter of of 2020,” she says.

“Even if disaster relief and fiscal stimulus are delivered swiftly, resource constraints (a lack of skilled tradespeople, water, equipment and appropriate building materials) mean reconstruction will be very slow.”



The panel began compiling its responses when the bushfires weren’t as bad as they subsequently became and before the emergence of the Wuhan coronavirus.

It delivered its final forecasts on January 20 when the worst of the bushfires appeared to have passed but before the coronavirus had spread to Australia.

The effects of both won’t be known for some time.

2020 is turning out to be a year of uncertainty, as well as low expectations.


The Conversation 2020 Forecasting Panel

Click on economist to see full profile.


Read more: Buckle up. 2019-20 survey finds the economy weak and heading down, and that's ahead of surprises The Conversation


Peter Martin, Visiting Fellow, Crawford School of Public Policy, Australian National University

This article is republished from The Conversation under a Creative Commons license. Read the original article.

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Wednesday, January 08, 2020

In fact, there's plenty we can do to make future fires less likely

One of the dominant ideas buzzing around the internet is that there’s little we can do to escape the prospect of more frequent and worse bushfires - ever.

That’s because there’s little we can do to slow or reverse the change in the climate.

Australia accounts for just 1.3% of global emissions. That’s much more than you would expect on the basis of our share of world’s population, which is 0.33%. But even if we stopped greenhouse gas emissions as soon as we could and started sucking carbon back in (as would be possible with reafforestation) it’d make little difference to total global emissions, which is what matters – or so the argument goes.

But this argument ignores the huge out-of-proportion power we have to influence other countries.

There’s no better indicator of that than in Ross Garnaut’s new book Super-power: Australia’s low-carbon opportunity.

We’re more important than we think

Garnaut conducted two climate change reviews for Australian governments, the first in 2008 for the state and Commonwealth governments, and the second in 2011 for the Gillard government.

In the second, he produced two projections of China’s emissions, based on what was known at the time.

One was “business as usual”, which showed continued very rapid increases. The other took into account China’s commitments at the just-completed 2010 United Nations Cancun climate change conference.

China’s annual emissions matter more than those of any other country – they account for 27% of the global total, which is a relatively new phenomenon.

The bulk of the industrial carbon dioxide already in the atmosphere was put there by the United States and the Soviet Union, who have been big emitters for much longer.

Egged on by the US Obama administration and by governments including Australia’s under Julia Gillard, China agreed at Cancun to slow its growth in emissions, and at the Paris talks in 2015 hardened this into a commitment to stabilise them by 2030.

The extraordinary graph

Garnaut’s 2011 projections showed growth moderating as a result of China’s commitment, which was at the time a cause for optimism.

When he returned to the numbers in 2019 to prepare his book, he was stunned. Egged on by the example of countries including the US and Australia, China had done far, far better than either “business as usual” or its Cancun commitments. Instead of continuing to grow rapidly, or less rapidly as China had said they would, they had almost stopped growing.

The graph, produced on page 29 of Garnaut’s book, is the most striking I have seen.



Since 2011, China’s emissions have been close to spirit-level flat. They climbed again only from 2017 when, under Trump in the US and various Coalition prime ministers in Australia, the moral pressure eased.

From the start of this century until 2011, China’s consumption of coal for electricity climbed at double-digit rates each year. From 2013 to 2016 (more than) every single bit of China’s extra electricity production came from non-emitting sources such as hydro, nuclear, wind and sun.

There are many potential explanations for the abrupt change. Pressure from nations including the US and Australia is only one.

What happened once could happen again

And there are many potential explanations for China’s return to form after Trump backslid on the Paris Agreement and Australia started quibbling about definitions. An easing of overseas pressure is only one.

But, however brief, the extraordinary pause gives us cause for hope.

Australia can matter, in part because it is hugely respected in international forums for its technical expertise in accounting for carbon emissions, and in part because of its special role as one of the world’s leading energy exporters.

Garnaut’s book is about something else – an enormous and lucrative opportunity for Australia to produce and export embedded energy sourced from wind and the sun at a cost and scale other nations won’t be able to match.


Read more: Australia could fall apart under climate change. But there's a way to avoid it


Some of it can be used to convert water into hydrogen. That can be used to turn what would otherwise be an intermittent power supply into a continuous one that enables around-the-clock production of the green steel, aluminium, and other zero-emission products Japan, Korea, the European Union and the United Kingdom are going to be demanding.

It’s a vision backed by Australia’s chief scientist.

It wouldn’t have been possible before. It has been made possible now by the extraordinary fall in the cost of solar and wind generation, and by something just as important – much lower global interest rates. Solar and wind generators cost money upfront but cost very little to operate. Interest rates are the cost of the money upfront.

At least three consortia are drawing up plans.

There’s not much to lose

There’s much that needs to be done, including establishing the right electricity transmission links. But Garnaut believes it can all be done within the government’s present emissions policy, helping it achieve its emission reduction targets along the way.

What’s relevant here is that moving to ultra-low emissions would do more. It could give us the kind of outsized international influence we are capable of. It could help us make a difference.The Conversation


Peter Martin, Visiting Fellow, Crawford School of Public Policy, Australian National University

This article is republished from The Conversation under a Creative Commons license. Read the original article.

Read more >>