Sunday, July 8, 2012

The Age Economic Survey. Coming up roses?

AUSTRALIA is set to do it again. BusinessDay's half-yearly economic survey has found our private sector economists believe the country will grind its way through the 2012-13 financial year to record solid growth, despite risks of Europe's problems deadening the world economy.

Our economists see Australia broadly continuing along its present path, dodging any significant fallout from the eurozone crisis, but divided into two economies travelling at very different speeds. Unemployment will grow.

The panel is hopeful, though far from certain, that the biggest threat to global growth the potential breakup of the eurozone will be averted, or failing that, managed in a way that avoids sparking what Monash University's Jakob Madsen terms "irrational investor behaviour".

Whether Greece remains in the euro or not, most of the panel expects Australia to be largely unaffected by Europe's crisis. Any impact will be swamped by the strength of the mining construction boom, and continued demand for minerals from China and India.

On average, our 22 forecasters predict Australia's gross domestic product will grow by 2.9 per cent in the coming 12 months, within the 2.5 to 3.5 per cent range forecast by the Reserve Bank, although slightly less than the budget forecast of 3.25 per cent as the year average.

They expect global output in 2012 will expand by 3.2 per cent, a bit less than the 3.5 per cent forecast in April by the International Monetary Fund. But many in the panel see global confidence returning in 2013, lifting prices for Australia's mining exports, and reversing the slide in the terms of trade.

Most disregard the forecasts of a further fall in commodity prices, and signals by BHP and Rio that mining projects could be put on hold. They say mining construction work for the next year or two is now locked in, and while prices may have peaked, the peak in mining investment is several years away.

But some warn that mining construction too will peak in 2014 or so, and then will no longer contribute to the nation's growth. While mining exports by then should be growing strongly, policymakers will face challenges in managing the transition to other drivers of growth.

On specific questions, the panel is optimistic about the long-term future of Australian agriculture although not necessarily of farmers but pessimistic about the future of manufacturing.

Most see a brighter future for retailing, but only if it adapts to the dual challenges of online competition and modest long-term growth in spending. AMP's chief economist Shane Oliver warns that over the next decade, online retailing will expand from 5 per cent of sales to 15 per cent, and Australian retailers will have to be innovative to keep their share.

Michael Workman, of the Commonwealth Bank, forecasts increasing competition from "large, category-based overseas groups" entering Australia. NAB's Alan Oster and BT's Chris Caton warn that retailers will have to take on their landlords to force down rents as part of stringent cost-cutting.

For 2012-13, most economists in the financial sector have forecasts similar to those of Treasury and the Reserve Bank. They see business investment and consumer spending as our two growth engines: investment growing 12.3 per cent, and consumer spending by 2.8 per cent, both a tad below the official forecasts.

Inflation will remain under control, with underlying inflation likely to be 2.5 per cent, while unemployment will stabilise at 5.5 per cent.

Half the panel expects the Reserve will make one more interest rate cut, then leave rates on hold for the rest of the financial year. Shane Oliver and Westpac's Andrew Hanlan are in a minority who share the market view that three more rate cuts lie ahead.

Most see the sharemarket rising over 2012-13, but there are mixed views about how much. On average, the panel sees the S&P/ASX200 index climbing back to 4345 by the end of 2012, and to about 4600 by next June.

There are also differing views about where the dollar will go, with forecasts for December ranging from US90? to $US1.10; on average, the forecast is for it to be slightly below current levels at US98?.

The current account deficit will return to haunt us, with the panel expecting it to rebound to $62 billion or 4 per cent of GDP; Paul Bloxham of HSBC puts it as high as $88.6 billion or 5.7 per cent of GDP, which would revive old concerns.

The panel is also divided on how Treasurer Wayne Swan's budget will end up: 10 predict a small surplus, eight forecast a small deficit, and four stayed scrupulously neutral.

Overall, the Commonwealth Bank's Michael Workman is the most optimistic of the market economists. He sees global growth rising to 4 per cent this year, exceeding expectations, low interest rates sparking a housing recovery, and a rebound of confidence lifting global share markets and miners' export prices.

By contrast, Richard Gibbs, of Macquarie Bank, predicts Australia's growth will shrink to 2.3 per cent in 2012-13, as the high dollar, cautious consumers and a deepening housing slump cramp activity outside the minersphere.

He predicts that unemployment will climb to 6 per cent by December; Saul Eslake, of Merrill Lynch, estimates it will be 6.1 per cent by next June. If they're right, that could do Labor significant damage in the campaign.

The academic economists served up the most challenging forecasts. Melbourne University macroeconomist Neville Norman won our Palme d'Or as the best forecaster of 2009-10 for predicting a strong rebound from recession, then won it again in 2010-11 when he warned that the recovery would lose strength rather than gaining it, as most had forecast.

This year Professor Norman has come up with another eye-opener: 2012-13, he says, will be stronger than anyone expects. He predicts growth of 4.1 per cent ahead, with China surprising us by growing 9.6 per cent, the miners bringing in enough workers to lift business investment by 18 per cent, and consumers regaining a bit of their old elan.

This time next year, Professor Norman predicts we'll be in a different world. The Reserve Bank will have hiked interest rates four times to head off rising inflation, returning the cash rate to 4.5 per cent. Share prices will have rebounded more than 30 per cent, lifting the S&P/ASX200 index to 5400.

Across the Yarra at Monash, by contrast, Professor Madsen predicts Australia will be more or less in recession in 2012-13, with growth slumping to just 0.4 per cent. He sees the US going down for a double dip, consumers in Australia saving instead of spending, and housing construction and manufacturing wilting.

On specific questions attached to the survey:


THE panel is almost unanimous in expecting Greece to stay in the euro, at least for now. Saul Eslake sums up the consensus view: "The costs of having Greece leave (and either having other countries leave too, or having to incur more costs to prevent 'contagion') outweigh the costs of keeping Greece in it."

There is also broad unanimity that Australia would suffer little damage unless Greece left in a "disruptive" way. Confidence could be dented, and bank funding costs rise, and mineral prices fall. But we would see either the dollar go helpfully lower, or global investors pour money into Australia in a flight to quality.


MOST agree that minerals prices have probably peaked, but for mining investment, the peak is still two or three years away.

Richard Robinson, of BIS Shrapnel, notes that "a number of mega-LNG, iron ore and coal projects, which have already started, are still in the process of ramping up to their peak construction phase".

Some, however, add that when the boom does peak, it will be a jolt for an economy which has come to rely on it to provide half the nation's growth.

Andrew Boak, of Goldman Sachs, warns that "the capex fade will become an increasingly important headwind to growth from around the first half of 2014".


THE consensus is warily optimistic about the future of retailing, but only if it adapts to the new world of slower spending growth and more online competition. NAB's Alan Oster warns: "Currently, retailers are discounting heavily to encourage shoppers into their stores, but given high operating costs (e.g. rents, wages, etc) this is not a long-term sustainable strategy".


NO ONE is optimistic that manufacturing can reverse its decline, at least while the dollar remains high. Australian Workers Union economist Brad Crofts, who should know, says manufacturing is under pressure not only from the dollar, but from "subsidised imports which are limiting the sector's ability to compete on equal terms", and its inability to pass on costs "including compliance with regulations and reliance on expensive services such as legal and accounting".

Some note that many manufacturers are doing well regardless. "Niche, innovative and productive manufacturers will survive and grow", says Hans Kunnen of the St George bank. Only Brad Crofts advocates a more active industry policy, with many panellists strongly opposing it.


AGRICULTURE is seen as having a bright future, thanks to Asia's rapidly growing demand for high-protein food and two wet years filling the dams and sub-soils. But there are some caveats.

Saul Eslake advises the sector to "focus on supplying things that the growing Asian middle classes want, at the quality and presentation standards they expect". BT's Chris Caton warns that agriculture might thrive while farmers go under. "Every farmer I've ever met is going broke. The small family farm will continue to struggle".

THE year 2011-12 made those in the financial sector work for their money. Nothing turned out as expected. Twice we were facing disaster. The market turned from bull to bear, then part of the way back again. Anyone who saw it all coming is too bright to be working for a living.

Europe was overwhelmed by public and financial sector debts, and slumped into recession. Twice the markets fell into panic, only to pull out short of a 2008-level meltdown. The Reserve Bank slashed interest rates, mining investment grew more than the rest of the economy combined, and jobs growth slowed.

Yet, the forecasts of our panel a year ago weren't too bad. They missed detail, but their key insight was while Australia's economy would be a mix of slow and fast-growing sectors, it would stay on track, to record steady growth. And it did. The panel forecast GDP would grow 3.2 per cent in year-average terms, with unemployment edging down and interest rates edging up. Growth looks to have been about 3 per cent, with unemployment edging up and interest rates down.

Our private sector panel was closer to reality than the Reserve, which forecast 4.5 per cent growth, or Treasury, which tipped 4 per cent. Most of the panel did not see the slide in asset values coming, but they tipped the fall in the terms of trade, and the dollar edging lower.

Normally we award the Palme d'Or to the forecaster of the year but this time no one stood out. Jakob Madsen of Monash University was a contender; he alone tipped that interest rates would go down. Investors should give Professor Madsen a call, but we can't give him the Palme d'Or, because he also tipped Australia would go into a recession.

Many would see Westpac guru Bill Evans as the forecaster of the year, for his call in tipping the Reserve would cut rates by a full percentage point, when everyone else was tipping rate rises. But Bill made that call two weeks after our survey was published, which disqualifies him.

Greg Evans, policy director at the Australian Chamber of Commerce and Industry, topped the panel in forecasting the shifts in global share values, and exchange rates. In a year when most of the panel was as closely bunched as a Tour de France peloton, we're putting the yellow jersey and the Palme d'Or away for next time.