Growth expected to continue, but at a sedate pace

Dramatic change in the next year is unlikely, according to the predictions of the economists on BusinessDay's panel, writes Peter Martin.

F IRST the good news. None of our panel expect a recession. All expect a record 22nd year of continuous economic growth. But it will be weak.

Treasurer Wayne Swan says he is aiming for "trend" growth, which means growth close to Australia's long-term trend of 3.25 per cent. But only three of our panel expect growth anything like that this financial year. Only six expect it this calendar year.

The weakest forecasts put growth at less than 2 per cent. The average forecasts are for 2.6 per cent this financial year and 2.7 per cent in the year to December.

The forecasts suggest the government won't make enough money to return the budget to surplus by June, as it has now acknowledged. Only three forecasters think it could get there - they are Michael Workman, of Commonwealth Bank; Alvin Pontoh, of TD Securities; and Stephen Koukoulas, of Market Economics; who until recently was Prime Minister Julia Gillard's economic adviser. They're predicting surpluses of $1 billion to $1.5 billion. All the rest go for deficits of between $5 billion and $20 billion. The numbers sound big, but they are a huge improvement on the $43.7 billion deficit of last year. Swan will be able to argue his finances are moving in the right direction.

"The budget deficit will have still fallen sharply, it'll be in far better shape than most other developed countries," says AMP Capital's Shane Oliver. "I think we and financial markets will be able to live with a delay in the return to surplus."

The BusinessDay economic survey uniquely incorporates the views of financial markets economists, academic economists and two working in industry groups, the Australian Industry Group and the Australian Workers Union.

A year ago its average forecast correctly picked Australia's economic growth rate of 3 per cent, a December unemployment rate of 5.5 per cent (the latest is 5.2 per cent) and a Chinese economic growth of 8.1 per cent (the latest is 7.4 per cent). This year the average international forecasts are for continuing

strong Chinese growth of 7.8 per cent and for United States growth of 2.3 per cent.

The US forecast is built on the assumption legislators reach a lasting agreement to avoid the worst of the "fiscal cliff", which had threatened to reduce tax cuts and government spending at the end of last year. Steve Keen, of the University of Western Sydney, is not confident. He is predicting zero economic growth in the US this year and deeply recessionary growth of 1 per cent worldwide. The average global forecast for the year ahead is 3.1 per cent, little different to the anaemic year just passed.

But Australia's terms of trade will continue to slide. In the year to September export prices slipped 14 per cent relative to import prices, and in the September quarter alone they slid 4 per cent. Iron ore prices have recovered since then, climbing from a low of $US87 a tonne to $US135, but on balance our panel expects our trading terms would remain weak, being down 6 per cent in the year to June 2013 and 3 per cent in the year to December 2013.

A few panel members expect the terms of trade to rise this year. National Australia Bank's Alan Oster expects a rise of 5.5 per cent. But none expect a rise in the course of the financial year. The fall to date has been great.

As a result, business investment - especially in mining - will grow far more slowly than the 20 per cent-plus a year we have grown used to. The average forecast is for 5.4 per cent in 2013, but the range of forecasts is wide, from continuing blistering growth of 16.5 per cent predicted by Melbourne University's Neville Norman to a fall of 5 per cent forecast by Macquarie Group's Richard Gibbs.

Most of the panel expect housing investment to fill some of the gap left by mining. After falling by about 6 per cent in the past year, housing investment should climb 5 per cent according to the average forecast. Only one of the panel expects housing investment to continue to slide - Jakob Madsen, of Monash University, who is expecting a fall of 5 per cent. Neville Norman is the most bullish, predicting a recovery of 10 per cent.

Household spending, now growing at a rate of 3.3 per cent a year, is expected to weaken to 2.9 per cent. Brad Crofts, of the Australian Workers Union, expects the most, 4.5 per cent, and former Treasury modeller Stephen Anthony, of Macroeconomics, the least, 1.8 per cent.

On interest rates, the panel on balance expects only one cut in the year ahead, but the forecast range is wide: from Gibbs, Anthony and Keen who expect four more cuts taking the cash rate to an ultra-low 2 per cent, to Norman, University of Tasmania modeller Mardi Dungey and former Reserve Bank economist Paul Bloxham, who expect between one and three interest rate rises.

Reserve Bank governor Glenn Stevens has indicated his immediate decision will be whether to cut, telling Fairfax Media in December: "Whether or not we need to go lower, we'll see how that turns out in the new year."

The panel believes he will do whatever is necessary to stop unemployment climbing too much higher, with none except the most pessimistic of the growth forecasters, Richard Gibbs, expecting the unemployment rate to climb above 6.3 per cent. Paul Bloxham expects it to stay where it is, at 5.2 per cent.

Inflation will provide little impediment, in the view of the panel. None expect the headline inflation rate to climb above 3 per cent. Before the introduction of the carbon tax, in June, Opposition Leader Tony Abbott said its impact on the cost of living would be "almost unimaginable". His treasury spokesman, Joe Hockey, said it would "drive up the price of everything". At a year-end press conference Abbott said the Treasurer's decision to abandon his pledge to deliver a 2012-13 surplus would drive prices even higher.

But the panel expects a perfectly contained headline inflation rate of 2.5 per cent - exactly the middle of the bank's 2 to 3 per cent target band. The

so-called underlying inflation rate monitored by the Reserve Bank would be a touch lower at 2.4 per cent - even less a cause for concern.

Two forecasters, Koukoulas and Keen, are predicting an excessively low underlying inflation rate of 1.5 per cent - so low it would effectively require action

by governor Stevens to

reflate the economy under the

terms of its agreement with the Treasurer.

Four of our panel have views on the Australian dollar that would greatly please him. In December, he observed the dollar was "a bit on the high side".

Unless it comes down in line with the terms of trade, it will be hard for trade-exposed parts of the economy to pick up the baton from mining investment as it comes off the boil.

Su-Lin Ong, of RBC Australia, Saul Eslake of Bank of America Merill Lynch and Bloxham and Norman expect the dollar to fall below $US1, but none of the others do. The highest forecast is for an Aussie of $US1.05 in a year's time; the lowest is for is for US95¢.