During the election we were promised jobs and growth.
But The Conversation’s 2019-20 forecasting panel is predicting an economic growth rate as weak as any since the financial crisis in the year ahead, as well as dismal consumer spending, no improvement in unemployment or wage growth, and an increased chance of recession.
On the upside, the panel expects iron ore prices to stay higher for longer than did the budget, it expects home prices to stabilise, and it is predicting the lowest government bond rate on record, making it cheaper than ever before for the government to borrow and spend its way out of trouble.
The panel predicts a surplus in name only in 2019-20, and overwhelmingly believes the government should be prepared to abandon it, if it has to, in order to keep the economy growing.
Despite expecting neither employment nor inflation to grow fast enough to meet the Reserve Bank’s (RBA) targets in 2019-20, the panel expects only one more cut in interest rates this financial year, which would take the cash rate to 1 per cent.
As in January, The Conversation has assembled a forecasting panel of 20 leading economists from 12 universities across six states. Among them are macroeconomists, economic modellers, former Treasury, IMF, OECD and Reserve Bank officials, a former government minister and a former member of the Reserve Bank board.
Whereas in January only three members of the 20-person panel expected the RBA to cut interest rates, and most expected an economic growth rate approaching 3 per cent (which is the Treasury’s estimate of the most that can be achieved on a sustained basis), this time all but two expect the bank to cut again, perhaps on July 2, and most expect a growth rate closer to 2 than 3 per cent – one of the most anaemic since the financial crisis.
The forecasts suggest 2019-20 will be unimpressive at best. At worst, shocks from overseas or a deepening malaise at home will necessitate strong action to keep the economy growing.
The panel’s average forecast for year-on-year growth is 2.1 per cent. Year-on-year growth is the measure used in the budget. It compares economic activity throughout all of one financial year with activity throughout all of the previous financial year. The budget forecast for 2019-20 is 2.75 per cent.
Respected forecasters including former RBA board member Warwick McKibbin and former OECD director Adrian Blundell-Wignall expect much lower growth than 2.1 per cent. Professor McKibbin expects 1.8 per cent; Professor Blundell-Wignall expects 1.5 per cent. Only three of the panel’s 20 forecasts are close to Treasury’s. The rest are lower.
The panel expects robust US growth of 2.6 per cent in 2019, although many members are concerned about the year that will follow. The only panellist to forecast low US growth in this year 1 per cent is Professor Blundell-Wignall, who until last year analysed world economies in his role as special adviser to the OECD secretary-general.
Jobs growth will disappoint both the Treasury – which has forecast unemployment of 5 per cent by the end of the financial year – and RBA Governor Philip Lowe, who has adopted a target of “4 point something”.
All but three of the 20-person panel expect the rate to stay above 5 per cent. The average forecast is 5.3 per cent, which is close to the present 5.2 per cent.
Dr Nigel Stapledon says Australia’s recent strong employment growth has been “out of kilter” with slower GDP growth and the winding down of housing construction, meaning jobs growth is set to slow down, pushing up unemployment.
Brendan Coates says underemployment is also climbing, as more people work fewer hours than they would like, making it harder for them to push for wage rises. Rebecca Cassells points out that full-time employment has grown almost twice as fast among women than men, which, given the low rates of pay in the industries that traditionally employ women, is likely to further depress average wages.
The headline measure of living standards, GDP per capita, has been falling, but a better measure, real net disposable income per capita, which takes better account of buying power, has been continuing to climb. The panel expected to climb a further 1 per cent over the year to June 2020, after climbing 1.3 per cent in the year to March.
Nominal GDP, which takes full account of mining revenue and drives company profits and the budget revenue, has grown 5 per cent over the past year and is expected to grow 3 per cent in the year ahead.
The risk of recession
The panel regards a recession as more likely than it did in January, assigning a 29 per cent probability to a conventionally defined recession in the next two years, up from 25 per cent.
Economic modeller Janine Dixon says the bulk of Australia’s recent economic growth has come from higher commodity prices via exports.
She says without them, Australia would be reliant on weak wage and consumption growth, although she believes high population growth will be enough to ensure economic activity doesn’t shrink for two consecutive quarters, which would be the conventional definition of a recession.
Probability of a conventionally-defined recession (two consecutive quarters of negative real GDP growth) in the next two years (by June 2021).
Former Treasury and ANZ Bank economist Warren Hogan says with consumers tightening their belts, an external shock could easily knock Australia into a recession.
Julie Toth, an economist at the Australian Industry Group who has also worked for the Productivity Commission, says with growth already low, it won’t take much to turn it negative.
Debt theorist Steve Keen, who assigns a 95 per cent probability of a recession (as he did in January) says Australia escaped that fate during the global financial crisis in part by boosting grants to first-home buyers, which made Australian households among the most indebted in the world and “put off the day of reckoning” when those debts would be unwound.
Through a mix of good luck and good management, Australia has avoided a recession during three global downturns since the early 1990s: The 1997 Asian economic crisis, the early 2000s dotcom collapse and the 2007-09 global financial crisis. If it succeeds again, it will enter its fourth decade recession-free in this term of government in mid-2021.
Wages and prices
The panel expects continued historically wage growth of only 2.2 per cent in 2019-20, slightly weaker than the latest reading of 2.3 per cent and well short of the budget forecast of 2.75 per cent. If that average forecast is right, it will be the seventh consecutive year in which wage growth has fallen short of the budget forecast.
The good news (for wage earners) is that even that unusually low rate of wage growth would be well above the rate of inflation, which is expected to be only 1.5 per cent, or 1.4 per cent on the so-called “underlying” basis watched closely by the RBA.
The bad news for the RBA is that it will put inflation well outside the bank’s target band of 2 to 3 per cent for the fifth consecutive year, raising questions about whether there is any point to the band.
Mark Crosby, professors Hogan and Blundell-Wignall suggest broadening the target band to 1 to 3 per cent. Tony Makin and Dr Stapledon suggest cutting it to 1to 2 per cent.
Richard Holden and Professor McKibbin suggest ditching it altogether and replacing it with a target for nominal GDP growth. Professor McKibbin suggests a nominal GDP target of 6 per cent which, given the present forecast for weaker nominal GDP growth, would mean interest rate cuts. In better times it would mean rate rises.
Chris Edmond and Craig Emerson defend the 2 to 3 per cent inflation target saying that what is really concerning is the bank’s preparedness to stay beneath the target band for extended periods.
The panel expects only modest falls in Sydney and Melbourne house prices of 2 to 3 per cent in each city after falls of 10 per cent over the past year. It is more optimistic on home building than is the Treasury, expecting housing investment to fall by 4.9 per cent rather than the budget forecast of 7 per cent.
Predictions for Sydney and Melbourne home prices, and housing investment, year to June 2020. Click on column headings to sort table by that column.
Interest rates and the budget
Perhaps surprisingly, given its forecasts for weak employment growth, weak economic growth and weak inflation, the panel’s average forecast for interest rates is for just one more cut, perhaps as soon as July 2, but some time in the second half of the year.
Only five panellists expect a follow-up cut in the first half of next year, but among them are Dr Emerson, professors Holden and Keen, who were the only three to correctly forecast in January that there would be a rate cut at all this year.
Professor Holden expects two further rate cuts in the second half of this year, taking the RBA cash rate to 0.75 per cent, and then a further two in the first half of next year, taking it to just 0.25 per cent. Professor Keen expects one further cut on the second half of this year and another two in the first half of next year, taking it to 0.5 per cent.
Professor McKibbin is the only panellist expecting the RBA to change course, expecting one further cut this year and then a series of increases as ballooning debt makes the RBA and other central banks realise they cut too far, pushing the cash rate back up to 1.5 per cent.
Predictions for Reserve Bank cash rate, 10 year bond rate. Click on column headings to sort table by that column.
The panel expects a government 10-year borrowing rate of just 1.5 per cent, which is about the lowest it has ever been. A year ago the 10-year bond rate was 2.7 per cent.
The ultra-low rate will both make it easier for the government to borrow and cut the cost of servicing its existing debt as loans are rolled over.
In further good news for the budget, the panel expects a substantially higher spot iron ore price than does the government, of $US95 a tonne by mid next year instead of the fall to $US55 assumed by the Treasury.
The forecast is somewhat above the Department of Industry’s new July forecast of $US95 a tonne by the end of this year trending down to $US61 by the end of 2020, but way in excess what was forecast in the budget.
A sensitivity analysis included in the budget said that for every $US10 that the iron ore price was higher than budgeted, the government’s tax take would be $1.1 billion higher in 2019-20 and $3.7 billion higher in 2020-21.
The panel expects the Australian dollar to remain broadly where it is at just below US70 cents as the upward push from strong commodity prices offsets the downward push from domestic economic weakness.
Yet despite the iron ore price and lower borrowing costs the panel expects a much weaker budget outcome than the $7.1 billion surplus forecast in April.
Its average forecast is for a surplus of only $1.2 billion, which is a mere sliver of gross domestic product (0.07 per cent), practically indistinguishable from a deficit of the same amount.
For the overwhelming majority of the panel that expect a weaker-than- forecast surplus or a deficit the reasons are economic weakness and the need to respond to that weakness through spending or tax cuts.
Asked whether should the government strive to continue to deliver its promise of a surplus if economic growth remains weak or weakens further, Professor Blundell-Wignall replied bluntly, “Of course not”.
The only panellists prepared to defend the continued pursuit of a surplus in the economy remained weak or weakened were Ross Guest, who said it was a worthwhile aim given the steady rise in government debt to GDP ratio, and Professor Makin, who qualified his reply by saying the surplus should be achieved by pruning unproductive expenditure, such as industry assistance, rather than deferring tax cuts.
Former government minister Dr Emerson regretfully forecast that the government would deliver a surplus whatever the economic circumstances, for political reasons.