Australia to "muddle through"; avert recession by comfortable margin

Quite a long article from SMH here which discusses economic forecasts for Australia. 

It's interesting to note that even the pessimistic forecasts still see China growing at 6% or they see interest rate cuts stimulating the economy and thus Australia avoiding recession by a fair margin.

The optimists see growth close to trend and actually accelerating through 2014-2015 as mining exports ramp up.

As I noted in my blog post the other day, forecasting GDP is a mug's game - even the RBA can't do it - but if pushed I'd have to align myself with the more pessimistic of those forecasts, but nevertheless, monetary policy should work and Australian economy should continue to grow...

"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.

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.

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.

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 interest 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 fives.

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 in 2014, with a bit of help from the dollar.

The pessimists are not too pessimistic: they expect the Reserve to move fast to nip trouble in the bud, with two or three rate cuts by Christmas. Most believe that will see the economy return 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 interest rate cuts by Christmas, while Macquarie's Richard Gibbs predicts three.

The market economist 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."

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