A panel of independent economists says we won't reach forecasts but we'll eventually pick up speed, writes Tim Colebatch.
Australia's growth in 2013-14 will be slow, but it won't stop. The mining investment boom has probably peaked, but will decline only gradually. Unemployment will rise in coming months, but will stay below 6 per cent.
The key message from Australia's independent economists in Fairfax Media's half-yearly economic survey is that the economy is unlikely to meet official growth forecasts in 2013-14, or, for that matter, 2014-15. The baton change from mining investment to other drivers of growth will not be smooth.
But the consensus is that Australia will muddle its way through, without suffering too much damage. In 2013-14 the economy is forecast to grow by 2.35 per cent. That is appreciably less than Treasury's budget forecast of 2.75 per cent growth, but it roughly maintains the growth pace of recent months.
By 2014-15, most of the 27 economists surveyed expect the economy to be picking up speed, growing by 2.75 per cent. The budget has forecast 3 per cent growth, which has become the new trend growth rate since 2000.
If the population keeps growing at its present rate of 1.75 per cent, that implies that growth per head - the economy's real bottom line - will be just 0.6 per cent this year and a modest 1 per cent in 2014-15, well below its trend growth rate of 1.5 per cent.
The survey, bringing in economists from financial institutions, universities, consulting firms and industry groups, has done a remarkable job of forecasting recent economic trends. Two years ago, when the Reserve Bank forecast growth of 4.5 per cent in 2011-12, and Treasury tipped 4 per cent, our panel predicted it would be just 3.2 per cent - very close to the actual growth rate of 3.4 per cent.
A year ago, the budget forecast growth in 2012-13 to be 3.25 per cent, and the Reserve Bank forecast 3 to 3.5 per cent. Our panel predicted it would be just 2.9 per cent, and for the three quarters to March, that has been exactly on target.
This year's forecasts differ significantly from the budget forecasts in three areas:
The panel is far less optimistic about export prices. While Treasury predicts that the terms of trade - the ratio of export prices to import prices - will largely hold its ground in the next 12 months, declining only 0.8 per cent, the panel predicts it will fall by 4.9 per cent, implying further pressure on Australia's high-cost mines.
The budget assumed the peak of the mining boom is still ahead, tipping business investment to rise a further 4.5 per cent in 2013-14, generating an extra $12.5 billion of output. Since then, the March quarter national accounts have shown business investment peaked last September, making our panel far more pessimistic. On average, the panel forecast business investment to decline by 0.6 per cent in 2013-14, cutting $1.5 billion from the nation's output. After a decade in which business investment grew on average by more than 10 per cent a year, that would be a dramatic change, especially in the resource states.
Treasury's budget forecasts assumed lower rates would reignite consumer spending, which it predicted would grow by 3 per cent in 2013-14. Again, recent data suggests the "green shoots" celebrated in January and February have withered. The panel is less sanguine than the budget, on average tipping consumers to buy only 2.4 per cent more in 2013-14 than they did last year. That implies another tough year for traditional stores, with online retailers and service providers already taking most of the growth in retail spending. It is also bad news for state governments, which rely heavily on the GST collected by retail stores to fund services.
While many in our panel believe the Australian dollar needs to fall significantly further to restore the global competitiveness of non-mining industries such as manufacturing and tourism, few expect it to happen in 2013-14. On average, the panel expects the dollar to shuffle down to US91¢ by Christmas, and US89¢ by mid next year.
They don't see the global economy as much help either. The panel expects China's growth in 2013 to slow to the 7.5 per cent set by the Chinese government as its minimum benchmark. The US economy would grow just 2 per cent, with global growth underperforming again at just 3.15 per cent.
But as always, there is a wide diversity of views on the panel. While everyone has their individual insights, the forecasts and accompanying comments show three broad streams among our panel members.
The optimists share the view of Treasury and the Reserve Bank that economic growth will be close to trend this year, and accelerate into 2014-15, as mining exports gather pace, the lower dollar lifts trade-exposed industries, and lower rates stimulate a housing recovery and higher consumer spending.
Three market economists - BT's Chris Caton, Citi's Paul Brennan and TD Securities' Alvin Pontoh - predict that there will be no more rate cuts, and the Reserve's next move will be to lift interest rates early next year. They expect growth to average 3 per cent over the next two years, and unemployment to stay in the 5s.
The middle ground of panellists expect one more rate cut this year, with the Reserve then likely to stay on hold. They too see the economy picking up speed next year, with a bit of help from the dollar.
The pessimists are not too pessimistic: they expect the Reserve to move to nip trouble in the bud, with two or three rate cuts by Christmas. Most believe that will return the economy to trend growth by 2014-15.
Tim Toohey of Goldman Sachs, Bill Evans of Westpac, Su-Lin Ong of RBC and Greg Evans of ACCI tip two rate cuts by Christmas, while Macquarie's Richard Gibbs predicts three.
Most worried about 2014-15 is Merrill Lynch's Saul Eslake. He warns that by then mining investment will start falling off the cliff - dragging growth down to 2 per cent and blowing out the federal budget.
In a category of their own are our resident pessimists, Jakob Madsen of Monash University and Steve Keen, recently retired from the University of Western Sydney. Keen is the only panel member to forecast a recession. He predicts output will slump 0.5 per cent this financial year, as China's growth slows to 6 per cent, causing commodity prices to crash and take the dollar with them. The dollar's fall would at least mean a rapid rebound in 2014-15.
Madsen picks growth to slow, to 1.5 per cent this financial year and just 1 per cent in 2014-15. He too sees China's growth slowing abruptly, but he also sees the Reserve Bank reversing course to raise rates in response to higher expectations of inflation and federal budget deficits.
Melbourne University's Neville Norman, our top forecaster in 2009-10 and 2010-11, sketches an unusual scenario: lowish growth this year (2.22 per cent), which then accelerates dramatically to 3.8 per cent in 2014-15, as China defies the sceptics, households replace ageing durables, and a new federal government lifts business confidence by tackling the deficit - among other things, by lifting the GST to 18 per cent. Now that would be an interesting future.