Weak economy needs support post-pandemic, economists forecast

What will our economy look like and what’s it mean for your planning? Everyone has a view but what do our leading economists think?

This article is republished from The Conversation. The author is Peter Martin.

Australia’s economy 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% this financial year to just 2.2% by 2024-25, well below the average of 2.6% assumed in the recent intergenerational report.

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.

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%.

The panel’s average forecast of 2.2% by the end of the four-year budget forecasting horizon is lower than both the budget forecast of 2.5% and the 2.6% in the intergenerational report.

Economic modeller Janine Dixon expects growth of just 1.7%. 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 panel expect extraordinarily strong growth in the United States of 5.2% throughout 2021 on the back of what panelist Warren Hogan calls massive government stimulus and a full-vaccination rate approaching 50%.

China’s growth is forecast to rebound to 7.9% but could come under pressure from 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.

Unemployment to fall quickly

The panel expects unemployment to fall more quickly than the government does, to 4.7% by mid-2022, a low the budget didn’t foresee until mid-2023.

The unemployment rate is already 5.1%, 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.

Slower home price growth

The panel expects weaker home price growth in the year ahead, with the CoreLogic Sydney price index climbing 6.4% after a year in which it soared 11.2%.

Melbourne prices should climb a further 5.2% after a year in which they gained 5%.

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% to 1.5% in accordance with moves overseas.

The panel expects further increases to a still low 1.8% by the end of this year and to 2.2% 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.

Markets steady

On balance, the panel expects the US-Australia exchange rate to stay where it is at around 76 US cents as it has for years, noting that much will depend on the iron ore price and the strength of the US economy.

On average, it expects no change in the Australian share market after 12 months in which the ASX200 has soared 24%.

The average hides sharp differences. Some panelists expect the ASX200 to climb a further 10%, while others expect it to fall 10%. One panelist, economic modeller Stephen Anthony, expects a collapse of 55%, saying it “smells like a blood bath is coming”.

A list of panelists can be found here.

The author of this article is Visiting Fellow, Crawford School of Public Policy, Australian National University. The item first appeared on The Conversation.