#AceNewsReport – July.03: The panel forecasts much weaker business investment than does the budget and lower household spending, but higher wage growth and lower unemployment. It expects a flat share market, and slower growth in house prices.
#Pandemic Recovery: Economy will be weak and in need of support after the pandemic, top economists say and will limp along after recovering from the #pandemic, failing to regain the growth it had either in the years leading up to the crisis or the much higher growth in the decades before.
That’s the consensus of the 23 leading Australian economists assembled to take part in The Conversation’s July 1 forecasting survey — a panel that includes former Treasury, Reserve Bank and International Monetary Fund officials and modellers and policy specialists from 13 Australian universities.
On balance, the panel expects year-average economic growth (the measure reported in the budget) to slide from 4 per cent this financial year to just 2.2 per cent by 2024-25, well below the average of 2.6 per cent assumed in this week’s intergenerational report.
Weaker economic growth
During the decade leading up to the COVID-19 crisis, economic growth averaged 2.6% per year. During the 27 years between the early 1990s recession and the crisis, it averaged 3.2 per cent.
The panel’s average forecast of 2.2 per cent by the end of the four-year budget forecasting horizon is lower than both the budget forecast of 2.5 per cent and the 2.6 per cent in the intergenerational report.
Economic modeller Janine Dixon expects growth of just 1.7 per cent. She says after Australia has soaked up unemployment, its future economic growth can only be driven by population growth or improved productivity.
With population growth expected to be weak for several years, GDP growth will be weak unless dwindling productivity growth rebounds.
Forecasting veteran Saul Eslake says on the other hand, for as long as borders remain closed Australia should enjoy an “artificial boost” to domestic spending of more than A$50 billion per year from Australians who can’t spend abroad.
The two most optimistic forecasts of 3 per cent growth, from Angela Jackson and Sarah Hunter, are contingent on borders reopening and tourism and immigration restarting.
The panel expect extraordinarily strong growth in the United States of 5.2 per cent throughout 2021 on the back of what panelist Warren Hogan calls massive government stimulus and a full-vaccination rate approaching 50 per cent.
China’s growth is forecast to rebound to 7.9 per cent, but will come under pressure from what panelist Mark Crosby describes as an attempt by some of China’s customers to diversify the sources of supply away from China.
Support from iron ore
The panel expects actual living standards to be higher than the bald economic growth figures suggest.
This is because high iron ore prices boost Australians’ buying power (by boosting the Australian dollar) and boost company profits in a way that isn’t fully reflected in gross domestic product.
In recent months, the spot iron ore price has been at a record US$200 a tonne, a high the budget assumes will collapse to near US$63 by April next year as supply held up in Brazil comes back online.
The panel is expecting the iron ore price to stay high for longer than the Treasury — for at least 18 months, ending this year near a still-high US$158 a tonne.
There’s agreement that at some point the unusually high price will fall, with one panelist saying there might be “one more year to ride this wave, then who knows”.
Because the panel expects a higher iron ore price than the government in the year ahead, it expects a greater rise in nominal gross domestic product — the measure of cash pouring into wallets. The panel forecasts an increase of 5 per cent this financial year compared to the budget forecast of 3.5 per cent.
But it expects consumer caution to limit growth in household spending to 4.2 per cent, much less than the budget forecast of 5.5 per cent.
Unemployment to fall quickly
The panel expects unemployment to fall more quickly than the government does, to 4.7 per cent by mid-2022, a low the budget didn’t foresee until mid-2023.
The unemployment rate is already 5.1 per cent, something the May budget didn’t expect for a year. However, it is to some extent artificially assisted because jobs that used to go to temporary foreign workers and were not counted in the employment statistics are now being taken by domestic workers who are counted.
As foreign workers return to Australia, the process will unwind, putting upward pressure on the recorded unemployment rate.
Wage growth better than budget
The May budget forecast wage growth of just 1.5 per cent in 2021-22 (less than forecast price growth), followed by only 2.25 per cent in 2022-23 (merely matching price growth), in part because of legislated increases in employers’ super contributions.
The forecasting panel is more optimistic for the year ahead, being able to take account of the Fair Work Commission’s 2.5 per cent increase in award wages announced in June.
Warren Hogan calls 2.5 per cent the new “baseline”, with some labour shortages forcing some employers to offer more.
Even so, the panel’s average wage growth forecast for 2021-22 is 2.2 per cent, only marginally above expected price inflation of 2.1 per cent.
Slower home price growth
The panel expects weaker home price growth in the year ahead, with the CoreLogic Sydney price index climbing 6.4 per cent after a year in which it soared 11.2 per cent.
Melbourne prices should climb a further 5.2 per cent after a year in which they gained 5 per cent.
The panelists say much will depend on how long mortgage rates remain at their record lows, what action authorities take to restrain lending and when immigration restarts.
Low rates for some time
Over the past year, the bond rate at which the Commonwealth government can borrow for ten years has jumped from 0.9 per cent to 1.5 per cent in accordance with moves overseas.
The panel expects further increases to a still-low 1.8 per cent by the end of this year and to 2.2 per cent by the end of next year.
Even so, the panel expects no increase in the Reserve Bank’s cash rate — the one that drives variable mortgage rates — for almost two years, until April 2023.
Former Reserve Bank head of research Peter Tulip, now with the Centre of Independent Studies, says the bank meant it when it said it said it wouldn’t lift the record-low cash rate of 0.1 per cent until actual inflation was “sustainably within” its 2-3 per cent target range, something that wasn’t likely until 2024.
Other panelists, including economic modeller Warwick McKibbin, believe those criteria might be met sooner, some as soon as mid-2022.
#AceNewsDesk report ………Published: July.03: 2021:
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