At last, our dollar worries the Reserve Bank

THE Reserve Bank's view of the year ahead foresees the economy growing at trend, against a background of grey clouds: a two-speed economy, with little growth in jobs, and a lot of downside risk from Europe, and the high dollar.

It sees the carbon tax having surprisingly little impact on underlying inflation: just 0.25 percentage points in 2012-13, then no more. It sees mining investment peaking in 2013-14, barely a year away, and detracting from growth thereafter.

If you think that's easily replaced, the Reserve points out that in 2011, even net of imports, mining investment made up most of the growth in our GDP.

The Reserve is troubled by Europe. It's on edge about the US, and the partisan impasse over the budget deficit. But it's relaxed about China, seeing its economy as having hit bottom and about to rebound as stimulus measures take effect.

Part of its concern about Europe is that it sees the investor exodus from European bonds ending up here, and pushing up the Australian dollar at a time when falling commodity prices should be driving it down.

What is new in yesterday's Statement of Monetary Policy is that for the first time, the Reserve accepts that a persistent high dollar could do more damage than it expected to businesses exposed to global prices which now includes much of the economy, as the internet spreads global competition to our service industries.

The Reserve does not canvass possible solutions, such as the Swiss policy of setting a cap on the exchange rate, and printing money to keep it there or in other ways, as advocated by its former board member Warwick McKibbin.

But it sees the high dollar forcing trade-exposed business to lift productivity sharply. That implies weakened jobs growth "in the near term" and a risk of "labour shedding across a range of industries", as the high dollar combines with the housing slump and deep spending cuts at federal and state levels.

It expects unemployment will "edge higher", wage growth will slow to 3.5 per cent, and inflation even with the carbon price to remain within its target band of 2 to 3 per cent.

Yesterday's statement does not imply an interest rate cut around the corner. But it implies that the Reserve is leaning that way. It sees the risks as mostly on the downside, but is sitting back to watch what unfolds, ready to hit the trigger if its fears are realised.

Commonwealth Bank's economics team summed it up as "cautiously optimistic". Yes, but it is more cautious than it was, and less optimistic than it was.

Some analysts interpreted the rise in its growth forecasts for 2012 as indicating stronger growth ahead. Wrong. It reflects stronger growth behind us, due to the Bureau of Statistics' surprisingly high first estimate of 1.3 per cent growth in the March quarter.

The Reserve assumes this will not be revised down much, but will lift the starting point for future growth. That could be optimistic. In the past, on average, high initial estimates of growth have been revised down by 0.4 percentage points. The bureau has already revised its estimate of March quarter retail spending by that much.

The key fact is that the Reserve has left its growth forecast to June 2013 unchanged: between 2.5 per cent and 3.5 per cent. And it has cut its forecast for growth in 2013-14 by half a percentage point, to the same range.

That is, the Reserve forecasts the growth rate over the next two years to be around 3 per cent, plus or minus half a percentage point. It describes this as "around trend". Good. There is a widespread but outdated assumption that our trend growth rate is 3.25 or 3.5 per cent; that was in the days of rising debt, and the Reserve believes those days are gone.

On Thursday, assistant governor Guy Debelle forecast that credit growth will remain subdued for years. He tipped it to grow "at the pace of nominal [GDP] 5, 6, 7 per cent most likely, for the next few years. I'm pretty sure we're not going back to double digit rates."

If he's right, that will have profound implications across the economy especially for growth in house prices, and for investments that depend on them rising at the pace we saw when housing credit was growing at double-digit rates: as it did, with two short breaks, from 1964 to 2008. Stable house prices will be good for first home buyers, bad for investors.

Second, slow growth in credit will have profound effects on banks, retailers, new housing and renovations, tourism, restaurants and discretionary expenditure of all kinds.

For all our talk of "cautious consumers", households have barely begun the task of deleveraging. The ratio of household debt to disposable income has shrunk only from 156 per cent at its peak to 150 per cent. It is still three times as high as it was 20 years ago.

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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:

GREECE

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.

THE MINING BOOM

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".

RETAILING

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".

MANUFACTURING

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

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".






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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.

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Age Half-Yearly Economic Survey - All okay?

AUSTRALIA'S private sector economists are less confident about the new financial year than their official counterparts, but nonetheless expect it to be a year of solid growth for Australia and the world.

At the end of a financial year that delivered rather less than they had expected, the panel of 19 economists in The Age half-yearly economic survey, by and large, predict growth to accelerate over the next 12 months, the sharemarket to rebound, commodity prices to peak and edge down, unemployment to fall, and interest rates to rise.

Given the risks hanging over the global economy partisan conflict in the US Congress making the nation ungovernable, government debts in Europe threatening to unravel the euro zone, China struggling to control its economy for a soft landing that would make 2011-12 a very good year for business, workers and investors in Australia.

Our panel of forecasters expects 2011-12 to be a normal year for the Australian economy. If it's right, Reserve Bank governor Glenn Stevens and Treasurer Wayne Swan will go down on their knees to give thanks.

On average, the panel predicts Australia's GDP to record year-average growth of 3.2 per cent in this new financial year. That's in line with its long-term average growth, but significantly below the 4.5 per cent growth forecast by the Reserve Bank, or the 4 per cent forecast by Treasury.

The gap between the panel and the official line is partly due to the presence of Monash University's resident pessimist, Jakob Madsen, who, for the third year in a row, is forecasting Australia and the US to sink into recession. One day he'll be right, but hopefully not this time.

The other members of the panel on average forecast growth to be 3.5 per cent. That is probably more like the way Reserve hopes the year will turn out, since that would not require it to show the same activism on interest rates.

No panel members believe that growth will reach the 4.5 per cent predicted by the Reserve in May. Only six thought Treasury's budget forecast of 4 per cent growth would be met.

Commonwealth Bank chief economist Michael Blythe is at the head of the bull pack. He sees Australia growing by 4.3 per cent over 2011-12, thanks to continuing strong growth in China and the global economy. Unemployment would fall to 4.5 per cent by next June but well before then, the Reserve would have stepped in twice to raise interest rates.

Professor Madsen is alone at the other end of the forecast range, predicting Australia will follow the US into recession in coming months, cutting annual GDP by 1.4 per cent in this financial year.

But four other forecasters predict growth in this new financial year will be less than 3 per cent. They include Katie Dean at the ANZ (2.5 per cent), Paul Brennan of Citigroup (2.9 per cent), Saul Eslake of the Grattan Institute (2.8 per cent). Worryingly, Neville Norman of Melbourne University predicts growth to be just 2.1 per cent.

That is worrying because for the second year in a row, Professor Norman has won the Palme d'Or as the most accurate forecaster in our survey. Two years ago he was one of few optimists to see a solid recovery coming. But last year, as now, he was the wary one, predicting below-average growth as higher interest rates held activity back.

Professor Norman sees China booming in the year ahead but the US floundering. That would slow global growth, bringing the Australian dollar back below parity, and sending unemployment back up, albeit only to 5.3 per cent by mid-2012.

The panel as a whole expects global growth to edge down slightly to 4.1 per cent in 2011, held back by slower growth in the US (2.6 per cent), Europe and Japan. There are differing opinions about China, where growth forecasts for 2011 range from 10.6 per cent (Professor Norman) to 8 per cent (Greg Evans of the Australian Chamber of Commerce and Industry).

For the most part, the panel expects unemployment to edge down over the next 12 months, to 4.7 per cent by mid-2012. No one sees a dramatic change ahead: the range of forecasts is between 4.2 and 5.5 per cent.

The panel as a whole expects the budget deficit to be halved to about $22 billion, a tad under Treasury's own forecast. But a few, including government insider Heather Ridout of the Australian Industry Group, predict it will end up a lot better than officially forecast, while a couple, including the outsiders at ACCI, predict it will end up a lot worse.

All the panel, apart from Professor Madsen, expect the Reserve to raise interest rates at least once by Christmas. An interesting detail: five of the 10 panel members from financial institutions, including ANZ, Commonwealth Bank and NAB, predict two rate rises by then but no one outside the financial sector shares that view.

The panel also divided over the future of the dollar. Four forecasters predict it to rise to $US1.10 by New Year's Eve; four think it will stay more or less where it is; five think it will edge back closer to parity; while six expect it to drop back below parity. John Rothfield of Merrill Lynch is the currency bear, tipping it to close the year at US93?.

Most of the panel expect a gradual rise in share prices over the new financial year. Of the 14 forecasters who chanced their hand at tipping the market, 11 see it heading up, on average predicting the S&P/ASX200 index to be nudging 5000 by New Year, and above 5300 by mid-2012.

But Professor Madsen expects it to sink to 4000, while our two Evans Bill Evans of Westpac and Greg Evans of ACCI see global jitters nudging the index down over the six months, and, in Greg's view, next year too.

On one of the big issues for the Australian economy, the panel shares a broad consensus that commodity prices are now nearing their peak and will be falling in the first six months of 2012.

On average, the panel predicts Australia's terms of trade (the ratio of export prices to import prices) to rise about 6 per cent between now and the end of the year then lose nearly all of that by next June to end the financial year where they started.

Some disagree. Katie Dean of ANZ sees the terms of trade continuing their rise into 2012, but at slower pace. But Master Builders economist Peter Jones joins Greg Evans in predicting that they've peaked already, with the terms of trade to sink 5 per cent in the rest of the year and 10 per cent in early 2012.

The official family probably wouldn't mind that at all, as it would reverse our path towards a two-speed economy. But they're not expecting it.

Click to Enlarge:

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Interest rate rise looms as wild card in election battle

AUSTRALIA'S market economists believe the Reserve Bank could have to raise interest rates next month in the middle of the election campaign, with new inflation figures likely to exceed its forecasts.

On Tuesday, the Reserve forecast that next week's inflation figures will show that underlying inflation fell below 3 per cent in the year to June, falling within its target range for the first time in three years.

But the minutes of the Reserve's July board meeting hinted that if underlying inflation tops 3 per cent, the August meeting would have to consider whether the new figures "materially changed the medium-term outlook for inflation" — and if so, raise rates.

Yesterday, a Reuters survey of 20 financial houses found most think underlying inflation will top 3 per cent on both the measures by which the Reserve has traditionally defined it.

Westpac, Goldman Sachs and UBS are forecasting an average reading of 3.1 per cent, slightly up from the previous quarter. Unless financial markets are in turmoil, that would probably force the Reserve's hand.

But traders from the same financial houses clearly disagree with their economists. The ASX target rate tracker puts the chance of an August rate rise at only 27 per cent. Traders expect the next rate rise is a year away.

The Reserve will also be influenced by global financial markets' reaction to the long-awaited results of stress tests on Europe's main banks, which were released last night.

If the reports fail to satisfy concerns about the banks or the stress test process, analysts warn they have the potential to send a new wave of fear through the global financial system, slowing lending and driving up wholesale interest rates.

The Bureau of Statistics yesterday estimated that soaring coal and iron prices pushed the average price Australia receives for its exports up 16 per cent in the June quarter, the sharpest rise since figures began in 1974.

But import prices rose only 1.9 per cent, with more than a third coming from higher petrol prices. That will have little impact on underlying inflation, or the risk of a rate rise.

On a rough measure, that implies Australia's terms of trade — the amount we get paid for our exports, relative to what we pay for imports — shot up 14 per cent in a single quarter, to be near record levels.

With China putting the brakes on its economy, however, coal and iron ore prices are forecast to fall.

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Mining tax backflip to cost billions Price of Gillard's peace deal revealed

THE federal government has revealed that changes to the mining profits tax negotiated with the big resources companies will cost the budget billions of dollars more than initially acknowledged.

New figures released by Treasurer Wayne Swan show that in 2013-14, the second year of the tax, it is expected to raise only $6.5 billion compared with $13 billion in its initial form.

Over the first two years, the expected take would shrink from $18 billion under the old version to $10.5 billion under the new.

The expected losses to revenue are far greater than the $1.5 billion claimed by the government when it unveiled the revised tax on July 2.

Explaining the discrepancy yesterday, the government said that since the original version of the tax was announced, Treasury had upgraded its expectations for mineral prices and exports.

The government failed to disclose this when it announced the revised version of the tax.

As the real cost of the tax backdown was exposed, the government came under attack over the issue from former Treasury chief Bernie Fraser, who accused Prime Minister Julia Gillard of selling out to the mining giants.

Mr Fraser also criticised Opposition Leader Tony Abbott for wanting to rescind the tax, saying it was amazing that an alternative prime minister could "put the vested interests of big mining companies ahead of the national interests of this country".

The tax controversy overshadowed Mr Swan's news of further improvement in the budget forecasts a boost also driven by higher estimates of commodity prices.

The government released the budget forecasts and mining tax details to help set the framework for the election, expected to be called within days.

Ms Gillard will appear at the National Press Club today and give a speech flagged to be on economic issues.

The new budget forecasts improve the bottom line by $7 billion over five years to 2013-14, mostly through higher estimates of company tax. Treasury says the improvement would have been $12.5 billion but for policy changes essentially to the mining tax.

The forecast budget surplus in 2012-13 has more than trebled from $1 billion to $3.1 billion. In the same year, the forecast peak in the government's net debt has fallen from $94 billion to $90 billion.

"These figures show we are on track to put the budget back in surplus within three years," Mr Swan said. "We will be in surplus before every other major advanced economy."

He emphasised that the surplus did not depend on revenue from the mining tax. "Despite all the uncertainty in the global economy, we can be confident about our future," he said.

But shadow Treasurer Joe Hockey and Coalition finance spokesman Andrew Robb dismissed the statement as "dodgy figures, used to explain a dodgy tax, delivered via a dodgy deal".

"The massive debt and deficit remains largely unchanged, the reckless spending will continue unabated, and the forecast of a surplus is still simply not believable," they said.

The bad news is that Treasury marginally cut its forecast of growth in 2010-11, from 3.25 per cent in the May budget to 3 per cent. Slower growth in consumer spending and housing investment is expected to be offset slightly by growth in mining.

Unemployment is tipped to be 5 per cent in mid-2011, much the same as now, despite the addition of 250,000 jobs.

The improved forecasts came as Westpac and the Melbourne Institute reported a stunning 11 per cent jump in consumer confidence in July. Most of the increase came from Coalition voters, who had previously been pessimistic. Now it is the poor who are most pessimistic.

The losses revealed from the mining tax backdown tend to confirm criticisms by analysts that the changes will cost tens of billions of dollars over a decade.

If mineral prices in coming years fell below Treasury's buoyant expectations, there is a risk that revenue from the tax would be too small to finance initiatives dependent on it company tax cuts, tax breaks for small business and better superannuation benefits.

But Mr Swan said he was confident the revised figures would be proved right. "Prices will go up, they'll come down," he said.

"But everybody can be confident that they will be a higher level [than] the historical average was."

Mr Fraser, who was head of the Reserve Bank from 1989 to 1996 and a former Treasury boss, said Ken Henry's resources tax in its original form was too complicated. "It was over-engineered in a way," Mr Fraser told ABC television.

And the subsequent minerals tax brokered with the big miners was a sellout, he said.

On Mr Abbott's vow to rescind the tax, Mr Fraser said it "amazes me, frankly, how any alternative prime minister or alternative government can put the vested interests of big mining companies ahead of the national interests of this country . . . Whoever has sort of really devised that line really has rocks in his or her head."

Mr Hockey said Mr Fraser's view of the Coalition was dead wrong. "I have never seen a tax that receives so much remuneration and is yet expected to create investment and create more jobs," Mr Hockey said.

Mr Fraser said the government should have been able to win the day on its mining tax plans, as former prime minister John Howard did with the GST.

"If Howard can sell a GST . . . and the government can't sell an RSPT without a great hullabaloo, something is very wrong," Mr Fraser said.

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Mining tax revenue is a guessing game - REALITY CHECK

"WHERE is the money coming from?" the Coalition wants to know. How can the government reduce the revenue base for its mining tax so drastically, yet reduce the revenue forecasts so little?

It's a good question. After all, the original tax applied to nearly all minerals, the new tax to just iron ore and coal. The old tax was to take 40 per cent of all profits above a return of 5 per cent or so.

The new tax will take 22.5 per cent of all profits above a return of 12 per cent. And that's not all the changes the miners won.

Sure, there are offsetting factors. The government will no longer have to pick up 40 per cent of mines' losses or pay royalties for miners now outside the tax. But several private analysts estimate the tax take will be far lower than Treasury has forecast.

Who is right? Yesterday's budget update shed some light but left uncertainty. It told us:

Treasury now thinks the prices and volumes of mineral exports will be much higher than it predicted earlier. It now says the original version of the tax would have raised $18 billion in its first two years, not the $12 billion originally forecast.

So the revised mining tax reduced its take in the start-up years from $18 billion to $10.5 billion. The government misled us by not mentioning this when it announced the new version on July 2.

The impact in years one and two of the new tax is stunningly different. In year one, the original version of the tax would have seen many companies claim losses. Under the new version, revenue that year is now forecast to fall by just $1 billion. But in year two, the forecast revenue will be cut in half by the new version of the tax: from $13 billion to $6.5 billion. That's a huge change. And surely, isn't year two the best guide to what will happen in years three, four, five, six and so on?

Not necessarily, says Treasurer Wayne Swan. We don't know what future prices will be.

"Prices will go up, they'll come down, they'll bounce around," he said. "But they will be a higher level [than] the historical average was."

Well, maybe. But that's exactly the point.

If Treasury can revise its revenue forecasts from the tax by 50 per cent in just two months, how can anyone seriously know how much it will raise in two years, four years, let alone 10 years?

Like everyone else, all Treasury can do is guess. The May estimates are guesses. The new estimates are guesses. The forecasts by the Coalition and private analysts are also guesses.

Treasury's forecasts are for the terms of trade to peak in the second half of 2010, then fall slowly. But if they fall fast? Or if companies find ways to avoid the tax? We could easily end up with too little revenue to pay for the tax cuts and new spending it is meant to finance. That's the risk.


THE MINING TAX

OLD AND NEW

REVENUE FORECASTS FOR: 2012-13, 2013-14 TOTAL

$b $b $b

Rudd version

Budget 3, 9 12

Now 5 13 18

New version

Now 4 6.5 10.5

Revenue loss -1 -6.5 -7.5

SOURCE: TREASURY

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Year ahead good but not great - half-yearly survey

AUSTRALIA'S market economists say there will be no double-dip recession here. The Age half-yearly economic survey finds they are expecting a year of something like normal growth, falling unemployment and rising interest rates.

They are also forecasting that the Australian dollar will stay around current levels over coming months, but share prices will rebound to the levels they were at over the summer months.

The survey, taken this week, asked 19 economists from banks, universities, employer groups and other institutions for their forecasts for the new financial year, as well as their opinions on some key issues.

With one exception, the survey found a strong consensus that the economy is heading for growth around long-term average levels. In all, 18 of the 19 economists submitted forecasts ranging from 2.6 per cent to 4.1 per cent, with an average of 3.25 per cent.

The average matches Treasury's forecast for 2010-11, but is somewhat less than the Reserve Bank's more bullish forecast in May of 3.5 per cent.

But the three university economists in our panel are far less optimistic than those in the markets. Monash University economist Jakob Madsen sees Australia falling victim to a double-dip global recession, which will also drag down the US, share values and the world economy in general.

Dr Madsen predicts unemployment will rise over the second half of 2010, and the Reserve Bank will deliver three interest rate cuts to prop up demand.

His traditional partner in pessimism, University of Western Sydney economist Steve Keen, also sees the world heading for a double-dip recession, but with Australia insulated somewhat by Chinese demand and federal stimulus.

Dr Keen, best known for his as yet-unrealised forecast that Australian house prices will fall 40 per cent, is predicting growth to remain stuck in third gear, with GDP growing in the new financial year by 2.7 per cent, despite rising unemployment.

The third academic on the panel, Melbourne University macro-economist Neville Norman, also sees the economy remaining stuck in third, rather than accelerating into fourth, as Treasury and the Reserve are forecasting. And that's a worry, because at this time last year Dr Norman proved the most accurate forecaster on the panel.

Last year he was the bull of the group. This year he is relatively bearish, predicting gross domestic product to grow just 2.6 per cent in the year ahead. He sees global growth stagnating, and inflation rebounding to 3.5 per cent by December pushing up bond yields and forcing the Reserve to throw in another three rate rises on to a sluggish economy.

The optimist of the group is Richard Gibbs, chief economist of Macquarie Group. He also sees bond yields rising, but along with interest rates, stock prices, and the dollar but driven by a rapid acceleration of growth rather than inflation.

Mr Gibbs predicts the economy will grow by 4.1 per cent over 2010-11, roughly double its growth rate in 2009-10. The world economy would also shrug off the double-dip fears and the debt crisis to chalk up 4.3 per cent growth over 2010.

But in his scenario, too, the Reserve responds by pushing interest rates up another two notches by Christmas. Indeed, while the financial markets are now punting on no interest rate rises before 2012, the market economists are unanimous in predicting that rates will rise before Christmas and the only division is on whether there will be just one rise or two.

One good reason why is that they expect inflation to inch back up, to the edge of the Reserve Bank's target range or beyond.

Of the 18 who forecast inflation over 2010, 14 predict the number will have a 3 in front of it.

Similarly, all the market economists predict a strong rebound in the sharemarket, on average to just under 5000 points on the S&P/ASX 200 Index by the end of the year. University and industry economists are more wary, though all but Dr Keen and Dr Madsen expect stocks to rise.

Virtually all our panel expect bond yields to rise from their present lows, with most tipping them to end the year somewhere in the high 5s.

There is also a general consensus that the dollar will rise from current levels, as markets shake off their fear of a double-dip slump.

Half the panel predicts the dollar will be at least US90 by the end of the year, although no one is bold enough to predict it will reach parity.

Only the three university economists see unemployment rising significantly. Five think it will remain around current levels, while the rest see it ebbing down to about 5 per cent or less by the end of the year.

Several also expect the federal budget to come in a bit better than Treasury has forecast a pretty safe bet, since the forecasts are designed to be beaten, unless there is a recession.

Former Treasury number cruncher Alan Oster, now chief economist at NAB, predicts it will come in at $35 billion, as against the Treasury forecast of $41 billion.

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Boom for miners but torture for others, long price boom on way - survey

THE tax on mining comes at the right time. Australia's market economists believe we are facing a boom in commodity prices that could last a decade or more and put pressure on other sectors by keeping the dollar high.

The Age survey, taken this week, finds most of Australia's financial houses expect the commodity price boom to become entrenched and continue long into the future.

Most also expect that the long boom for miners will be a long torture for other trade-exposed sectors such as manufacturing, agriculture, tourism and even education. But most also argue against government intervention to help them.

The panel of 19 economists was asked if it shared the view of Treasury and the Reserve Bank that Australia's mineral prices will remain high for decades, and, if so, what will that mean for the long-term level of the Australian dollar, and for other trade-exposed industries such as manufacturing, agriculture and tourism.

A clear majority broadly agreed that commodity prices have entered a long boom. They might come off their peaks, but global supply of iron ore and coal is thought unlikely to grow fast enough to close the gap with demand, driven by the industrialisation of China and India.

Commonwealth Bank's Michael Workman said conditions before the global financial crisis were ideal for mining investment, but even then, there was far too little of it to close the gap. And, he warned, "the next 10 years are likely to be a period of constrained global liquidity, which will be adverse for debt-based mining exploration and development".

ANZ chief economist Warren Hogan said commodity price cycles typically last for 30 or 40 years, and this one has just begun. "We do not expect commodity price levels to revert to the 'bear market' levels seen in the 1980s and '90s for at least another 10 to 20 years," he said.

But some disagreed. Richard Gibbs of Macquarie Bank pointed to the scale of Chinese investment in the mining sectors of Africa and Latin America.

"Ultimately, this will provide the scope for the introduction of competing supply of key minerals", he said.

NAB chief economist Alan Oster and BIS Shrapnel's Richard Robinson also warned that future technological breakthroughs in prices of solar energy and other renewable fuels could sharply reduce the value of Australia's coal and gas.

But what would this mean for the dollar? The consensus was that it will remain high, relative to the past, when over the two decades to 2005 it averaged US70. Only two forecasters put a number on it. CBA estimates it will average US80 over the next decade. Westpac's Bill Evans is more bullish, saying the combination of high commodity rises and Australia's interest rate differential will keep it around an average of US90.

What will that mean for manufacturing and other trade-exposed sectors? "Hollowing out," said Mr Robinson of BIS Shrapnel. "Large tradeable parts of manufacturing will become uncompetitive. Tourism and agriculture will also suffer."

And add higher education to that, warned Monash University's Jakob Madsen: "It is starting to look cheaper to take an education in the UK than in Australia." But while there was a strong consensus that other trade-exposed sectors would suffer if the dollar stays high for decades, few supported government intervention to offset it.

"This is the way resources get diverted to our most successful sector, to take advantage of the commodity price boom," wrote BT's Chris Caton.

Australian Industry Group chief executive Heather Ridout warned the high dollar will create "a major challenge" for business and government. She urged accelerated economic reforms.

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Norman conquest of the market soothsayers - half-yearly survey

THE year 2009-10 was better than anyone expected. Well, almost anyone. While gloom still dominated the scene at this time last year, some in our panel told us then that we were in for some pleasant surprises.

Our forecasters saw some of it, but not all. They told us China would prove stronger than the global financial crisis. They saw the global recession was almost over, and growth would return.

They told us the sharemarket would pick up, on average tipping the S&P/ASX 200 to close the financial year at 4364 points (almost right it was 4301.5).

But they didn't see how strong the rebound would be. No one came within cooee of guessing that unemployment last month would be 5.2 per cent (the average tip was 7.9 per cent). Only a few saw the Reserve Bank raising rates rapidly to slow demand.

Melbourne University's ebullient macro-economist Neville Norman naturally led the bulls. This time last year, Dr Norman forecast GDP growth of 2.5 per cent over the new financial year and predicted China would grow by almost 9 per cent; but warned inflation would remain high, and the Reserve Bank would throw in three interest rate rises before Christmas. There's a well-informed man.

Tim Toohey's team at Goldman Sachs also foresaw China booming, GDP growing 2.2 per cent, and the Reserve's four rate rises by mid-2010. BT's Chris Caton picked both the Australian and the US turnaround.

In a sense, the defining fact of 2009-10 was the stimulus-driven boom in China, and its impact on Australia's terms of trade, dollar and sharemarket. Most of our panel expected China to keep up a solid pace of growth, but Professor Norman and Macquarie's Richard Gibbs were the only ones to pick just how strong it would be.

Damien Boey of Credit Suisse was almost spot on in tipping the dollar to rebound to US85 by mid-2010, while NAB's Alan Oster and Telstra's Geoffrey Sims were also very close. Mr Sims came closest to tipping where local stocks would end up, while HSBC's Tony Cripps was right in undershooting the consensus to tip bond rates at just 5.10 per cent.

But the Palme d'Or for our forecaster of the year goes to Dr Norman not only for getting so many important tips right, but also for making macro-economics so entertaining for the generations of Age readers who have been his students.

Disclosure: Tim Colebatch also studied macro-economics under Professor Norman.

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