tag:theconversation.com,2011:/fr/topics/economic-forecasts-13720/articleseconomic forecasts – The Conversation2023-07-02T03:10:15Ztag:theconversation.com,2011:article/2084772023-07-02T03:10:15Z2023-07-02T03:10:15ZTwo more RBA rate hikes, tumbling inflation, and a high chance of recession: how our forecasting panel sees 2023-24<figure><img src="https://images.theconversation.com/files/534767/original/file-20230629-21-vu0a05.png?ixlib=rb-1.1.0&rect=299%2C305%2C3914%2C1678&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">DALL·E/Shutterstock</span></span></figcaption></figure><p>Of the 27 leading economists assembled by The Conversation to forecast the financial year that’s just begun, every one expects inflation to continue to fall.</p>
<p>The official quarterly measure of inflation peaked at 7.8% in the year to December and is now <a href="https://www.abs.gov.au/statistics/economy/price-indexes-and-inflation/consumer-price-index-australia/latest-release">7%</a>, and the newer monthly measure peaked at 8.4% and is now <a href="https://www.abs.gov.au/media-centre/media-releases/monthly-cpi-indicator-annual-rise-56-may-2023">5.6%</a>.</p>
<p>What’s at issue is how quickly inflation will continue to fall, how many more times the Reserve Bank will push up interest rates to make sure it falls as quickly as it wants, and the damage those rate hikes will do to an already very weak economy.</p>
<p>Twelve of the 27 think a recession is either more likely than not, or an even chance. And almost all expect a “per-capita recession”, in which economic growth fails to keep pace with population growth, sending living standards backwards.</p>
<p>Now in its <a href="https://theconversation.com/au/topics/conversation-economic-survey-81354">fifth</a> year, The Conversation survey draws on the expertise of leading forecasters in 25 Australian universities, think tanks and financial institutions – among them economic modellers, former Treasury, International Monetary Fund and Reserve Bank officials, and a former member of the Reserve Bank board.</p>
<h2>Two more interest rate hikes this year</h2>
<p>After 12 interest rate hikes that lifted the Reserve Bank’s cash rate from 0.1% to 4.1% in a little over a year, the panel expects two more.</p>
<p>The panel predicts a cash rate of <a href="https://cdn.theconversation.com/static_files/files/2736/2023-24_CONVERSATION_AU_FORECASTING_SURVEY.pdf">4.5%</a> by the end of this year, followed by a decline to 4.3% by the middle of next year, and to 3.9% by the end of 2024.</p>
<hr>
<p><iframe id="HdHVv" class="tc-infographic-datawrapper" src="https://datawrapper.dwcdn.net/HdHVv/15/" height="400px" width="100%" style="border: none" frameborder="0"></iframe></p>
<hr>
<p>Asked to specify the month in which the cash rate will peak, and how high it will go, the panel settled on a peak of 4.7% in November. </p>
<p>A cash rate of 4.7% would lift the typical rate on a new mortgage from 5.4% to 6%, adding a further $200 per month to the cost of servicing a $600,000 loan. </p>
<hr>
<p><iframe id="keoKF" class="tc-infographic-datawrapper" src="https://datawrapper.dwcdn.net/keoKF/7/" height="400px" width="100%" style="border: none" frameborder="0"></iframe></p>
<hr>
<p>But the extra pain would be short-lived. Asked how long the cash rate would stay at its peak before being cut, the panel’s average guess was <a href="https://cdn.theconversation.com/static_files/files/2736/2023-24_CONVERSATION_AU_FORECASTING_SURVEY.pdf">six months</a>, meaning rates would begin to fall in June next year.</p>
<p>Several of those surveyed warned against expecting rates ever to fall back to anything like the emergency lows of 2020 and 2021. Others noted that the one thing that could force the Reserve Bank to cut rates faster than expected was a recession.</p>
<h2>Plummeting inflation, an uptick in real wages</h2>
<p>The panel expects inflation to slide from 7% to 5.2% by the end of the year, then to 3.9% by mid-2024, and to 2.9% a year later – putting it back within the Reserve Bank’s 2-3% target band.</p>
<p>Although steep, the fall in inflation isn’t as fast as predicted by the bank <a href="https://www.rba.gov.au/publications/smp/2023/may/forecasts.html">itself</a> (3.6% by mid-2024) or the <a href="https://images.theconversation.com/files/534717/original/file-20230629-27-c3e0pf.PNG">Treasury</a> (3.25% by mid-2024).</p>
<hr>
<p><iframe id="H91Hv" class="tc-infographic-datawrapper" src="https://datawrapper.dwcdn.net/H91Hv/9/" height="400px" width="100%" style="border: none" frameborder="0"></iframe></p>
<hr>
<p>Barrenjoey Chief Economist Jo Masters said while price pressure from imported goods and fuel was easing, inflation was increasingly being driven by the prices of services such as rents that tended to be persistent.</p>
<p>Margaret McKenzie of Federation University identified the reopening of borders as a source of downward pressure on prices, saying it would ease labour shortages. </p>
<p>Moody’s Analytics’ Harry Murphy Cruise said although weaker spending was putting downward pressure on inflation, the Reserve Bank seemed unwilling to let that take its course and wanted to slow inflation more quickly, risking “knocking the wind out” of an already fragile economy.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/going-down-the-6-graphs-that-show-economic-growth-shrinking-206068">Going down: the 6 graphs that show economic growth shrinking</a>
</strong>
</em>
</p>
<hr>
<p>A welcome upside of much lower inflation forecasts is a forecast of the first increase in real wages in three years, albeit a small one.</p>
<p>The panel expects wages growth of 4% in the financial year ahead, just beating price growth of 3.9%. The resulting 0.1% increase in the so-called real wage would be followed by a more substantial increase of 0.7% in 2024-25 as wages growth of 3.6% topped price growth of 2.9%.</p>
<hr>
<p><iframe id="dU0X3" class="tc-infographic-datawrapper" src="https://datawrapper.dwcdn.net/dU0X3/9/" height="400px" width="100%" style="border: none" frameborder="0"></iframe></p>
<hr>
<h2>A per-capita (if not an actual) recession</h2>
<p><a href="https://www.abc.net.au/news/2023-06-16/nz-enters-a-recession-as-economy-shrinks-again/102477992">New Zealand</a> is already in a recession, and the panel assigns probabilities of 59% and 42% to the prospect of recessions in the United Kingdom and United States respectively, with the most likely start for both being the final three months of this year.</p>
<p>Throughout 2023, the panel expects economic growth of just 1.2% in the US and historically weak growth of 4.9% in China, suggesting Australia’s biggest customer for minerals will be unable to provide much help as Australia’s own economic growth dwindles.</p>
<p>The panel is forecasting Australian economic growth of just 1.2% in 2023 – the lowest rate outside a recession in more than 30 years, climbing to just 1.5% in the year to June 2024 and 2.3% in the year to June 2025. </p>
<hr>
<p><iframe id="hX2nT" class="tc-infographic-datawrapper" src="https://datawrapper.dwcdn.net/hX2nT/5/" height="400px" width="100%" style="border: none" frameborder="0"></iframe></p>
<hr>
<p>AMP Chief Economist Shane Oliver said if the low growth rate turns into what is usually called a recession (two consecutive quarters of shrinking gross domestic product) it will be because the Reserve Bank pushes up interest rates too far for highly indebted Australians to withstand.</p>
<p>He said consumer spending is almost certain to shrink as debt servicing costs hit a record high and, on the Bank’s <a href="https://www.rba.gov.au/publications/fsr/2022/oct/box-b-the-impact-of-rising-interest-rates-and-inflation-on-indebted-households-cash-flows.html">own analysis</a>, 15% of households with a variable-rate mortgage – roughly a million people – experience negative cash flow.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/why-rba-governor-philip-lowe-wants-to-damage-the-economy-further-207022">Why RBA Governor Philip Lowe wants to damage the economy further</a>
</strong>
</em>
</p>
<hr>
<p>Asked to estimate the chance of the Australian economy going into recession in the next two years, the panel’s average answer was <a href="https://cdn.theconversation.com/static_files/files/2736/2023-24_CONVERSATION_AU_FORECASTING_SURVEY.pdf">38%</a>, well up from the <a href="https://theconversation.com/higher-interest-rates-falling-home-prices-and-real-wages-but-no-recession-top-economists-forecasts-for-2023-198975">26%</a> the panel assigned to a recession in February’s survey.</p>
<p>KPMG Chief Economist Brendan Rynne assigned a 100% probability to what he called a “shallow, extended recession”, in which growth is first weighed down by a downturn in housing investment, followed by a slowdown in business investment.</p>
<p>The average forecast start date of a recession, should there be one, is the final three months of this year.</p>
<hr>
<p><iframe id="9gi1b" class="tc-infographic-datawrapper" src="https://datawrapper.dwcdn.net/9gi1b/5/" height="400px" width="100%" style="border: none" frameborder="0"></iframe></p>
<hr>
<p>The panel’s economic growth forecast of 1.5% for 2023-24 is well below the Treasury’s forecast of population growth of 2%, suggesting output per person will shrink in what is called a <a href="https://www.amp.com.au/content/dam/amp-au/documents/insights/recession-risk-oi-16-2023v2.pdf">per-capita recession</a>.</p>
<h2>Unemployment climbing, albeit slowly</h2>
<p>The panel expects a gradual increase in the unemployment rate from its present near-50-year low of 3.6% to 4.3% by mid-next year, followed by an increase to 4.6% by mid-2025.</p>
<p>The forecasts are in line with those of the Treasury and Reserve Bank, and suggest Australia is unlikely to surrender the big gains in employment made in the aftermath of the COVID lockdowns and return to the pre-COVID unemployment rate of 5%.</p>
<p>University of Tasmania economist Mala Raghavan said while job markets would become less tight as the economy weakened and as foreign students and migrants returned, the impact would be felt first in the underemployment rate, which reflects the extent to which workers are working fewer hours than they want.</p>
<hr>
<p><iframe id="QAiR0" class="tc-infographic-datawrapper" src="https://datawrapper.dwcdn.net/QAiR0/5/" height="400px" width="100%" style="border: none" frameborder="0"></iframe></p>
<hr>
<h2>Less household buying, higher house prices</h2>
<p>The panel expects growth in real household spending of just 1.5% in 2023-24, meaning the amount bought per household is likely to shrink.</p>
<p>Yet at the same time, it is forecasting continued modest growth in home prices, which climbed for the <a href="https://www.corelogic.com.au/news-research/news/2023/home-value-index-shows-housing-values-increase-in-june,-but-the-pace-of-growth-has-slowed">fourth month in a row</a> in June after falling since mid-2022.</p>
<p>Most of the panel expects further growth in Sydney and Melbourne home prices in the 12 months ahead, with only four panel members predicting declines. The average forecast is for both Sydney and Melbourne prices to climb a further 2%.</p>
<p>Former Productivity Commission economist Jenny Gordon identified renewed migration as a driver of demand, offset by declining real wages and the risk of a recession.</p>
<p>Jo Masters said sellers appeared to be withdrawing supply, with total listings a third lower than normal, while the buyers appeared to have higher incomes than before and lower debt-to-income ratios, meaning they were less troubled by high interest rates.</p>
<hr>
<p><iframe id="Pqwgu" class="tc-infographic-datawrapper" src="https://datawrapper.dwcdn.net/Pqwgu/9/" height="400px" width="100%" style="border: none" frameborder="0"></iframe></p>
<hr>
<h2>Tiny share market growth, tiny budget deficit</h2>
<p>The panel expects the budget surplus for the financial year <a href="https://www.finance.gov.au/publications/commonwealth-monthly-financial-statements/2023/mfs-may">just ended</a> to be followed by only a <a href="https://cdn.theconversation.com/static_files/files/2736/2023-24_CONVERSATION_AU_FORECASTING_SURVEY.pdf">tiny</a> budget deficit of A$9.4 billion in 2023-24, which would be less than 0.4% of GDP.</p>
<p>Two panellists, Mariano Kulish and Stephen Anthony, expect this year’s surplus to be followed by another one of $18 billion to 20 billion. Anther, Jenny Gordon, expects this year’s surplus to be followed by a budget in balance. </p>
<p>The forecasts reflect an iron ore price expected to stay near US$104 per tonne at the end of the year, instead of falling towards US$60 as forecast in the budget.</p>
<p>The panel expects modest share market growth of 3% in the year to June 2024, with the results sensitive to home prices (through the profits of financial corporations) and minerals prices (through the profits of mining companies).</p>
<hr>
<p><iframe id="Uk8Or" class="tc-infographic-datawrapper" src="https://datawrapper.dwcdn.net/Uk8Or/4/" height="400px" width="100%" style="border: none" frameborder="0"></iframe></p>
<hr>
<h2>The Conversation’s Economic Panel</h2>
<p><em>Click on economist to see full profile.</em></p>
<p><iframe id="tc-infographic-882" class="tc-infographic" height="400px" src="https://cdn.theconversation.com/infographics/882/0a0836b37189a0c0b4ab743abff911624a51c29e/site/index.html" width="100%" style="border: none" frameborder="0"></iframe></p>
<p><strong><a href="https://cdn.theconversation.com/static_files/files/2736/2023-24_CONVERSATION_AU_FORECASTING_SURVEY.pdf">Download the results on one page</a></strong></p><img src="https://counter.theconversation.com/content/208477/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Peter Martin does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The good news includes a return to real wage growth and a restrained increase in unemployment. The bad news includes even higher home prices and a per-capita recession.Peter Martin, Visiting Fellow, Crawford School of Public Policy, Australian National UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1989752023-02-05T03:08:42Z2023-02-05T03:08:42ZHigher interest rates, falling home prices and real wages, but no recession: top economists’ forecasts for 2023<figure><img src="https://images.theconversation.com/files/508174/original/file-20230205-13-n69h0m.png?ixlib=rb-1.1.0&rect=317%2C0%2C3676%2C1982&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Wes Mountain/The Conversation</span>, <a class="license" href="http://creativecommons.org/licenses/by-nd/4.0/">CC BY-ND</a></span></figcaption></figure><p>Australia’s Reserve Bank is set to push up rates once again at its first meeting for the year on Tuesday, according to <a href="https://cdn.theconversation.com/static_files/files/2528/2023CONVERSATIONFORECASTING_SURVEYResponses.pdf">all but two</a> of the 29 leading economists surveyed by The Conversation at the start of 2023. </p>
<p>Those experts predict we will still be living with higher rates by the end of the year, although they should start to come down in 2024.</p>
<p>Their average forecast is an increase in the bank’s <a href="https://www.rba.gov.au/statistics/cash-rate/">cash rate target</a> from 3.1% to 3.6% during 2023. That’s enough to add an extra A$190 to the monthly cost of servicing a $600,000 variable mortgage, bringing the total increase in the cost of servicing such a mortgage since the bank began hiking rates in May 2022 to more than $1,000.</p>
<hr>
<p><iframe id="FnZ6I" class="tc-infographic-datawrapper" src="https://datawrapper.dwcdn.net/FnZ6I/5/" height="400px" width="100%" style="border: none" frameborder="0"></iframe></p>
<hr>
<p>All but three of the specialists surveyed expect the Reserve Bank’s cash rate target to peak during 2023, and on average the panel expects it to fall back to close to its present level during 2024.</p>
<p>Panelist Jo Masters of Barrenjoey Capital says the bank’s keenness to bring down inflation will be tempered by the knowledge that a large number of borrowers are set to exit the very cheap three-year fixed-rate loans they took out early in the pandemic and are facing very steep increases indeed.</p>
<hr>
<p><iframe id="po6kU" class="tc-infographic-datawrapper" src="https://datawrapper.dwcdn.net/po6kU/5/" height="400px" width="100%" style="border: none" frameborder="0"></iframe></p>
<hr>
<p>The highest forecast for a peak in the cash rate is from former Reserve Bank research manager Peter Tulip, who expects a cash rate of 5% by December 2024 – enough to add a further $725 to the monthly cost of servicing a $600,000 mortgage.</p>
<p>The panel assembled by The Conversation includes macroeconomists, economic modellers, former Treasury, International Monetary Fund and financial market economists, and a former member of the Reserve Bank board. </p>
<p>Most expect inflation to fall sharply from here on, with all but five believing the quarterly rate will turn out to have peaked at 7.8% in <a href="https://theconversation.com/with-inflation-still-rising-the-rba-will-almost-certainly-lift-interest-rates-in-february-198504">December 2022</a>.</p>
<hr>
<p><iframe id="gBKWY" class="tc-infographic-datawrapper" src="https://datawrapper.dwcdn.net/gBKWY/9/" height="400px" width="100%" style="border: none" frameborder="0"></iframe></p>
<hr>
<p>Financial markets economist Warren Hogan says the food and fuel prices pushed up by Russia’s invasion of Ukraine are already falling, and the only question is how quickly inflation falls, and how soon it returns to the Reserve Bank’s <a href="https://www.rba.gov.au/inflation/inflation-target.html">2-3%</a> target band.</p>
<p>Former federal Labor minister Craig Emerson says, unlike in the 1970s, wage rises aren’t helping sustain inflation. Then, more than half the Australian workforce was unionised and wage setting was centralised. Today only <a href="https://www.abs.gov.au/statistics/labour/earnings-and-working-conditions/trade-union-membership/latest-release">one-eighth</a> of the workforce is unionised and most wages are not set centrally.</p>
<p>The panel expects real wages to go backwards for the third consecutive year in 2023, as wages growth of 3.9% is overpowered by prices growth of 4.5%.</p>
<hr>
<p><iframe id="E2jNn" class="tc-infographic-datawrapper" src="https://datawrapper.dwcdn.net/E2jNn/9/" height="400px" width="100%" style="border: none" frameborder="0"></iframe></p>
<hr>
<p>Wage growth is expected to fall back to 3.6% in 2024 as the economy weakens and as an increase in immigration helps fill labour shortages. But the average forecast is wage growth to outstrip price rises next year for the first time since 2020, as inflation falls back to 3.2%.</p>
<h2>Recession unlikely at home, more likely abroad</h2>
<p>The panel assigns a 26% probability to a <a href="https://www.rba.gov.au/education/resources/explainers/recession.html">recession</a> in the next two years, an increase on the <a href="https://theconversation.com/sky-high-mortgages-7-1-inflation-and-a-20-chance-of-recession-how-the-conversations-panel-sees-the-year-ahead-185411">20%</a> it assigned in mid-2022.</p>
<p>Former Department of Foreign Affairs and Trade chief economist Jenny Gordon says if Europe goes into a recession in its 2023-24 winter and China’s recovery is slow, a recession in Australia will become more likely.</p>
<p>While the panel expects China’s decision to end COVID lockdowns will lift its growth rate from 3% in 2022 to 4.7% in 2023, it does not expect anything like a return to the previous growth rates of 8% or more. </p>
<p>Industry economist Julie Toth says China is facing resource depletion and <a href="https://theconversation.com/chinas-population-is-now-inexorably-shrinking-bringing-forward-the-day-the-planets-population-turns-down-198061">population decline</a>, as well as a cyclical downturn in industrial and residential investment. COVID-19 presents an immediate threat to its people and economy.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/chinas-population-is-now-inexorably-shrinking-bringing-forward-the-day-the-planets-population-turns-down-198061">China's population is now inexorably shrinking, bringing forward the day the planet's population turns down</a>
</strong>
</em>
</p>
<hr>
<p>The panel assigns a 42% probability to a recession in the United States within the next two years, a 57% probability to a recession in the European Union, and a 73% probability to a recession in the United Kingdom.</p>
<p>Four of the economists surveyed believe the UK recession has already started. As in the US, it is likely to result from the run of interest rate increases put in place to contain inflation. </p>
<p>University of Tasmania economist Mala Raghavan expects the US to skirt an outright recession and instead experience a “rolling recession”, in which different parts of the economy take time to turn down.</p>
<hr>
<p><iframe id="ULZil" class="tc-infographic-datawrapper" src="https://datawrapper.dwcdn.net/ULZil/4/" height="400px" width="100%" style="border: none" frameborder="0"></iframe></p>
<hr>
<p>KPMG forecaster Sarah Hunter says while Australia should avoid a recession as commonly described (two consecutive quarters in which production shrinks) economic growth could well turn negative for one quarter at the start of the year, as household spending turns down and mining shipments are disrupted by floods.</p>
<p>Regardless, the economy will be “very weak by historic standards” in 2023. The panel expects economic growth of only 1.7% in 2023, climbing to 2.5% by 2026.</p>
<hr>
<p><iframe id="HC0ii" class="tc-infographic-datawrapper" src="https://datawrapper.dwcdn.net/HC0ii/2/" height="400px" width="100%" style="border: none" frameborder="0"></iframe></p>
<hr>
<p>The panel is forecasting very weak growth in household spending of <a href="https://cdn.theconversation.com/static_files/files/2528/2023CONVERSATIONFORECASTING_SURVEYResponses.pdf">2.2%</a> over the year to December, and a further decline in the household saving ratio from 6.9 to 5.1%.</p>
<p>Non-mining business investment is expected to hold up, climbing 2.8% over the year to December, up from 1.75%. Mining investment is expected to climb 3.4%, with much depending on demand from the rest of the world.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/how-housing-made-rich-australians-50-richer-leaving-renters-and-the-young-behind-and-how-to-fix-it-195189">How housing made rich Australians 50% richer, leaving renters and the young behind – and how to fix it</a>
</strong>
</em>
</p>
<hr>
<p>Home prices are expected to fall further in 2023 in response to higher interest rates, slipping another 7% in Sydney and 6% in Melbourne. </p>
<p>AMP economist Shane Oliver says the buying power of someone on average full-time earnings with a 20% deposit has fallen by more than one quarter as a result of interest rate hikes, and prices are yet to fully reflect this.</p>
<hr>
<p><iframe id="JQju4" class="tc-infographic-datawrapper" src="https://datawrapper.dwcdn.net/JQju4/5/" height="400px" width="100%" style="border: none" frameborder="0"></iframe></p>
<hr>
<h2>Jobs to hold up</h2>
<p>Australia’s unemployment rate dipped below 4% for the first time in five decades in 2022. It is expected to stay below 4% (at 3.96%) in 2023 and then remain below 5% in 2024 even as immigration builds up, in part because low unemployment has made <a href="https://theconversation.com/why-unemployment-is-set-to-stay-below-5-for-years-to-come-188705">previously unemployed Australians employable</a>.</p>
<p>As former Deloitte Access director Chris Richardson puts it, previously hard to employ Australians have been “polishing their skills and their resumes”.</p>
<p>Federation University economist Margaret McKenzie also points to the large amount of <a href="https://theconversation.com/an-extra-60-600-australians-found-work-in-may-heres-why-wages-arent-moving-much-184929">sick leave</a> being taken, creating demand for workers to fill the gaps.</p>
<hr>
<p><iframe id="45CLn" class="tc-infographic-datawrapper" src="https://datawrapper.dwcdn.net/45CLn/3/" height="400px" width="100%" style="border: none" frameborder="0"></iframe></p>
<hr>
<p>On average, the panel is expecting a flat share market in the year ahead, but the forecasts range from growth of 8% to a decline of 17%, led down by weaker bank stocks and household spending as interest rate increases bite. </p>
<p>The panel expects the iron ore price to remain roughly steady at US$105 throughout 2023, rather than falling to the US$55 assumed in the budget.</p>
<p>Partly as a result, the panel is forecasting a budget deficit of <a href="https://cdn.theconversation.com/static_files/files/2528/2023CONVERSATIONFORECASTING_SURVEYResponses.pdf">A$29.4 billion</a> in 2022-23, down from the officially forecast $36.9 billion.</p>
<hr>
<p><iframe id="HIUzm" class="tc-infographic-datawrapper" src="https://datawrapper.dwcdn.net/HIUzm/3/" height="400px" width="100%" style="border: none" frameborder="0"></iframe></p>
<hr>
<h2>The Conversation’s Economic Panel</h2>
<p><em>Click on economist to see full profile.</em></p>
<p><iframe id="tc-infographic-806" class="tc-infographic" height="400px" src="https://cdn.theconversation.com/infographics/806/c4eb69d660b32197eb65fea16a3be211fb79bc6b/site/index.html" width="100%" style="border: none" frameborder="0"></iframe></p>
<p><strong><a href="https://cdn.theconversation.com/static_files/files/2528/2023CONVERSATIONFORECASTING_SURVEYResponses.pdf">Download the 2023 economic survey</a></strong></p><img src="https://counter.theconversation.com/content/198975/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Peter Martin does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The Conversation’s 29-member panel expects very weak economic growth and recessions in much of the rest of the world, but there’s good news down the track for Australians’ buying power.Peter Martin, Visiting Fellow, Crawford School of Public Policy, Australian National UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1854112022-06-30T07:28:34Z2022-06-30T07:28:34ZSky-high mortgages, 7.1% inflation, and a 20% chance of recession. How the Conversation’s panel sees the year ahead<figure><img src="https://images.theconversation.com/files/471800/original/file-20220630-14-g8oyc7.png?ixlib=rb-1.1.0&rect=131%2C0%2C3862%2C1994&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Wes Mountain/The Conversation</span>, <a class="license" href="http://creativecommons.org/licenses/by-nd/4.0/">CC BY-ND</a></span></figcaption></figure><p>Homeowners will face mortgage rates near 5.5% in a little over a year, according to a survey of 22 leading Australian economists. </p>
<p>The Conversation’s 2022-23 <a href="https://cdn.theconversation.com/static_files/files/2149/2022-23_Conversation_Forecasting_Survey.pdf">forecasting survey</a> predicts an increase in the Reserve Bank’s cash rate from its present <a href="https://www.rba.gov.au/statistics/cash-rate/">0.85%</a> to a peak of 3.1% by next August.</p>
<p>If fully passed on, the series of rate hikes would lift the cost of payments on a variable $500,000 mortgage by about $600 per month and the cost of payments on a $800,000 mortgage by about $1,000 per month.</p>
<p>Sydney and Melbourne home prices would slide 6-7%.</p>
<p>The panel believes the Reserve Bank will push its cash rate to its highest point since the 2010-2012 resources boom in an effort to contain inflation, which it expects to jump from its present <a href="https://www.abs.gov.au/statistics/economy/price-indexes-and-inflation/consumer-price-index-australia/latest-release">5.1%</a> to a peak of 7.1% before the end of the year.</p>
<p>Panel members put the risk of an overreaction by authorities bringing on a recession at a 40% chance in the United States, and a lower 20% probability in Australia. </p>
<p>Now in its <a href="https://theconversation.com/au/topics/conversation-economic-survey-81354">fourth year</a>, The Conversation’s survey draws on the expertise of leading forecasters in 20 Australian universities and financial institutions, among them economic modellers, former Treasury, International Monetary Fund and Reserve Bank officials, and a former member of the Reserve Bank board.</p>
<h2>Inflation</h2>
<p>The panel expects the next inflation figure to be released later this month to show prices climbed 6.7% in the year to June – the most since the early 1990s.</p>
<p>Panelist Saul Eslake says it hard to be confident about when inflation will peak without being confident about when and how the conflict in Ukraine will end, although he says it is difficult to see energy prices climbing higher, and there is some evidence COVID-related supply disruptions are beginning to ease.</p>
<hr>
<p><iframe id="HJaa2" class="tc-infographic-datawrapper" src="https://datawrapper.dwcdn.net/HJaa2/2/" height="400px" width="100%" style="border: none" frameborder="0"></iframe></p>
<hr>
<p>On balance the panel expects inflation to peak at 7.1% towards the end of this year before declining next year.</p>
<hr>
<p><iframe id="XT501" class="tc-infographic-datawrapper" src="https://datawrapper.dwcdn.net/XT501/4/" height="400px" width="100%" style="border: none" frameborder="0"></iframe></p>
<hr>
<h2>Interest rate rises</h2>
<p>The panel expects the equivalent of five 0.25 point increases in the Reserve Bank’s cash rate in the next six months, and just short of another two 0.25 point increases in the six months that follow.</p>
<hr>
<p><iframe id="oQvXL" class="tc-infographic-datawrapper" src="https://datawrapper.dwcdn.net/oQvXL/2/" height="400px" width="100%" style="border: none" frameborder="0"></iframe></p>
<hr>
<p>On balance, the panel expects the cash rate to stop climbing when it gets to 3.1% next August, but some members expect much steeper increases. </p>
<p>Warwick Mckibbin, a former member of the Reserve Bank board, expects a cash rate of 4.5% (implying mortgage rates of 6.75%) by March, and he says that is less than required. </p>
<p>He says the cash rate needs to climb above the 3.5% that would normally be thought of as neutral, and stay there for a sustained period to bring inflation back to the Reserve Bank’s target.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/the-rbas-rate-hikes-will-add-hundreds-to-monthly-mortgage-payments-182241">The RBA's rate hikes will add hundreds to monthly mortgage payments</a>
</strong>
</em>
</p>
<hr>
<p>Former Commonwealth Treasury and financial markets economist Warren Hogan sees rates climbing for as many as five years, although his forecast is for four. </p>
<p>RBC Capital Markets head of economics Su-Lin Ong believes that won’t be needed to cool the economy, as the expiry of the ultra-cheap three-year fixed rate mortgages taken out during COVID will deliver a “market-induced tightening”.</p>
<hr>
<p><iframe id="jEPKK" class="tc-infographic-datawrapper" src="https://datawrapper.dwcdn.net/jEPKK/2/" height="400px" width="100%" style="border: none" frameborder="0"></iframe></p>
<hr>
<h2>Recession risk in the US and Australia</h2>
<p>The panel believes the United States is at a much greater risk than Australia of a miscalculation in which rates are pushed so high to contain inflation that they bring on a recession.</p>
<p>The US economy has already turned down in the <a href="https://tradingeconomics.com/united-states/gdp-growth">first three months</a> of this year, and the panel expects it to finish the year just 2.2% larger than when the year began. The panel expects unusually low economic growth of 2.6% in China.</p>
<hr>
<p><iframe id="BqxT0" class="tc-infographic-datawrapper" src="https://datawrapper.dwcdn.net/BqxT0/1/" height="400px" width="100%" style="border: none" frameborder="0"></iframe></p>
<hr>
<p>In the United States, the task of defining the start and end of recessions is assigned to the National Bureau of Economic Research’s <a href="https://www.npr.org/2022/06/24/1107581150/recession-referees">business cycle dating committee</a>. </p>
<p>The panel believes there is a 40% chance it will call a recession in the next two years, with the most likely start being March 2023.</p>
<hr>
<p><iframe id="JCGcX" class="tc-infographic-datawrapper" src="https://datawrapper.dwcdn.net/JCGcX/3/" height="400px" width="100%" style="border: none" frameborder="0"></iframe></p>
<hr>
<p>The panel assigns a lower 20% probability to a recession in Australia (commonly defined as two consecutive quarters of negative economic growth) and believes the most likely start date is August 2023.</p>
<hr>
<p><iframe id="TRqLX" class="tc-infographic-datawrapper" src="https://datawrapper.dwcdn.net/TRqLX/2/" height="400px" width="100%" style="border: none" frameborder="0"></iframe></p>
<hr>
<h2>Economic growth</h2>
<p>Absent recession, the panel expects economic growth to decline in line with forecasts in the <a href="https://images.theconversation.com/files/471744/original/file-20220630-22-qr6hhl.JPG">March budget</a> from year-on-year growth of 4.25% in 2021-22 to 2.5% over the coming five years. </p>
<hr>
<p><iframe id="CGxla" class="tc-infographic-datawrapper" src="https://datawrapper.dwcdn.net/CGxla/1/" height="400px" width="100%" style="border: none" frameborder="0"></iframe></p>
<hr>
<h2>Living standards</h2>
<p>The substantial increase in wage growth the panel expects from <a href="https://www.abs.gov.au/statistics/economy/price-indexes-and-inflation/wage-price-index-australia/latest-release">2.4%</a> in the year to March to 3.6% by June next year will be nowhere near enough to prevent real wages sliding. </p>
<p>Even with inflation down to 4.8% by then as forecast, real wages would go backwards by a further 1.2%.</p>
<hr>
<p><iframe id="Eqeyb" class="tc-infographic-datawrapper" src="https://datawrapper.dwcdn.net/Eqeyb/1/" height="400px" width="100%" style="border: none" frameborder="0"></iframe></p>
<hr>
<p>Weighing on further increases in wages growth will be a forecast nudge up in the rate of unemployment, from 3.9% to 4.2%. </p>
<p>ANZ chief economist Richard Yetsenga says while reopening Australia to skilled migrants, temporary visa holders, students and backpackers will add to the supply of workers, it should also boost already very strong consumer spending, limiting any increase in unemployment.</p>
<hr>
<p><iframe id="kYWMV" class="tc-infographic-datawrapper" src="https://datawrapper.dwcdn.net/kYWMV/1/" height="400px" width="100%" style="border: none" frameborder="0"></iframe></p>
<hr>
<p>The panel expects outsized real growth in household spending of 4.5% in 2022-23 boosted by what Barrenjoey Capital’s chief economist Jo Masters describes as elevated household savings, combined with continuing fixed rate mortgages and the <a href="https://theconversation.com/budget-2022-frydenberg-has-spent-big-but-on-the-whole-responsibly-180122">low and middle income tax offset payments</a> due to hit accounts from July.</p>
<p>The broadest measure of living standards, real net disposable income per capita, should continue to advance, although modestly.</p>
<hr>
<p><iframe id="I6k5j" class="tc-infographic-datawrapper" src="https://datawrapper.dwcdn.net/I6k5j/1/" height="400px" width="100%" style="border: none" frameborder="0"></iframe></p>
<hr>
<h2>Home prices</h2>
<p>The panel expects mortgage rate driven falls in home prices to reach 6-7% in Sydney and Melbourne over the coming year.</p>
<p>Julie Toth of Swinburne University and Nous Group expects the biggest impact in low and medium income suburbs, where buyers are more vulnerable to mortgage increases.</p>
<hr>
<p><iframe id="4ZALY" class="tc-infographic-datawrapper" src="https://datawrapper.dwcdn.net/4ZALY/1/" height="400px" width="100%" style="border: none" frameborder="0"></iframe></p>
<hr>
<h2>Markets</h2>
<p>The panel nonetheless expects solid growth in non-mining business investment of 6.4% (and mining investment of 7.6%), and an iron ore price above US$100 an ounce but sliding down from its present <a href="https://www.marketindex.com.au/iron-ore">US$130</a> to US$108.</p>
<p>It expects the Australian share market to end the financial year 2% lower.</p>
<hr>
<p><iframe id="4O8Ae" class="tc-infographic-datawrapper" src="https://datawrapper.dwcdn.net/4O8Ae/2/" height="400px" width="100%" style="border: none" frameborder="0"></iframe></p>
<hr>
<p>After a year in which the 10-year bond rate that determines the government’s cost of borrowing soared from 1.5% to 3.7%, panelists expect only a small further increase in 2022-23, to 3.9%.</p>
<p>After sliding from 75 US cents to 69 US cents, they expect the Australian dollar to climb modestly to 72 cents during 2022-23, putting some downward pressure on inflation.</p>
<hr>
<p><iframe id="TJi83" class="tc-infographic-datawrapper" src="https://datawrapper.dwcdn.net/TJi83/1/" height="400px" width="100%" style="border: none" frameborder="0"></iframe></p>
<hr>
<h2>The Conversation Economic Panel</h2>
<p><em>Click on economist to see full profile.</em></p>
<p><iframe id="tc-infographic-724" class="tc-infographic" height="400px" src="https://cdn.theconversation.com/infographics/724/1d0f9e6bf3a42a991c6707a5e90379cba49abc45/site/index.html" width="100%" style="border: none" frameborder="0"></iframe></p>
<p><strong><a href="https://cdn.theconversation.com/static_files/files/2149/2022-23_Conversation_Forecasting_Survey.pdf">Download the 2022-23 economic survey</a></strong></p><img src="https://counter.theconversation.com/content/185411/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Peter Martin does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The panel believes Australia will avoid a recession the year ahead, but is much less certain about the United States. It expects real wages to go backwards and economic growth to sink.Peter Martin, Visiting Fellow, Crawford School of Public Policy, Australian National UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1714062021-11-09T04:45:44Z2021-11-09T04:45:44ZEconomically, 2022 looks like an ideal time to land re-election<figure><img src="https://images.theconversation.com/files/430920/original/file-20211108-17-1d43ygp.png?ixlib=rb-1.1.0&rect=71%2C0%2C3532%2C1982&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Wes Mountain/The Conversation, CC BY-ND</span>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span></figcaption></figure><p>At the risk of being political – and politics is important, it will determine how we are governed for the next three years – economic conditions could scarcely be better for a government seeking re-election.</p>
<p>The economic things that matter most to most people are, in my view: </p>
<ul>
<li><p>jobs – if employment is climbing rather than falling, most people are not at much risk of losing their job</p></li>
<li><p>economic growth and wages growth – if things are getting better rather than worse, even in small ways, people feel better about the future</p></li>
<li><p>the ability to buy a home – if it is getting hard, even for other people or for their children, they are concerned about what the future will become </p></li>
<li><p>mortgage rates – as long as rates stay low they know their own personal budget won’t go out of whack</p></li>
</ul>
<p>Other things are said to matter, but I am less than convinced;
among them are the state of the federal budget (whether it is “<a href="https://static.ffx.io/images/$zoom_0.397%2C$multiply_0.7554%2C$ratio_1.776846%2C$width_1059%2C$x_0%2C$y_0/t_crop_custom/q_86%2Cf_auto/fd566c68c84ee157d46292c9ecf0800aa96b88ae">back in the black</a>”), tax cuts (once granted they are forgotten – Julia Gillard gave back more than the carbon tax and <a href="https://www.smh.com.au/environment/15-billion-in-tax-cuts-for-low-and-middle-income-earners-under-carbon-deal-20110710-1h8in.html">wasn’t thanked for it</a>) and esoteric concepts such as government debt.</p>
<h2>Jobs aplenty</h2>
<p>Earlier this year, just before the eastern states went into lockdown, more of Australia’s population was <a href="https://www.abs.gov.au/statistics/labour/employment-and-unemployment/labour-force-australia/sep-2021">employed</a> than ever before, more <a href="https://www.abs.gov.au/articles/insights-hours-worked-september-2021">hours</a> were worked than ever before and more jobs were <a href="https://www.abs.gov.au/statistics/labour/employment-and-unemployment/job-vacancies-australia/latest-release">on offer</a> than ever before.</p>
<p>Total hours worked fell during the lockdown months. But in those states without long lockdowns (those other than NSW, Victoria and the ACT) hours worked kept climbing to still-higher all-time highs. It’s an indication of what’s likely in NSW and Victoria now their lockdowns are over, something the Reserve Bank says it can <a href="https://www.rba.gov.au/publications/smp/2021/nov/overview.html">already see happening</a> in NSW.</p>
<p>The proportion of those working who say they’re underemployed (working fewer hours than they want) dived to an <a href="https://www.abs.gov.au/statistics/labour/employment-and-unemployment/labour-force-australia/sep-2021#data-downloads">eight-year low</a> before the mid-year lockdowns.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/just-4-5-during-lockdowns-the-unemployment-rate-is-now-meaningless-167805">Just 4.5% during lockdowns? The unemployment rate is now meaningless</a>
</strong>
</em>
</p>
<hr>
<p>I haven’t mentioned the unemployment rate (officially 4.6%) because at the moment the rate can’t be taken seriously.</p>
<p>It is that low mainly because to be counted as unemployed you need to be actively looking for work, and many workers stood down during the lockdowns and available to work <a href="https://www.abs.gov.au/statistics/labour/employment-and-unemployment/labour-force-australia/sep-2021#data-downloads">were not searching</a>, and also because of an oddity in the way the Bureau of Statistics counts <a href="https://www.abc.net.au/news/2021-06-17/australian-low-unemployment-due-to-exodus-foreign-workers/100219006">non-resident workers</a>.</p>
<p>Regardless, absent any lockdowns, in practical terms it is set to be easier to keep and find a job than it has been for a long time going into an election.</p>
<h2>Wage growth climbing</h2>
<p>Last year’s recession brought with it a collapse in wage growth as employers froze or cut wages, something that’s now being <a href="https://www.rba.gov.au/publications/smp/2021/nov/economic-outlook.html">unwound</a> as the economy picks up, albeit, as the Reserve Bank notes with apparent disapproval, “weighed down by more muted public sector wages growth”.</p>
<p>The bank’s latest forecasts, released on Friday, have wage growth climbing from 1.7% to almost <a href="https://www.rba.gov.au/publications/smp/2021/nov/economic-outlook.html">3%</a> over the next two years, which will be the fastest growth in a decade.</p>
<hr>
<p><strong>Actual and forecast wages growth</strong></p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/430969/original/file-20211109-17-1f0fnuj.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/430969/original/file-20211109-17-1f0fnuj.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/430969/original/file-20211109-17-1f0fnuj.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=307&fit=crop&dpr=1 600w, https://images.theconversation.com/files/430969/original/file-20211109-17-1f0fnuj.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=307&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/430969/original/file-20211109-17-1f0fnuj.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=307&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/430969/original/file-20211109-17-1f0fnuj.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=386&fit=crop&dpr=1 754w, https://images.theconversation.com/files/430969/original/file-20211109-17-1f0fnuj.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=386&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/430969/original/file-20211109-17-1f0fnuj.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=386&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Annual growth in ABS wage price index, excluding bonuses and commissions.</span>
<span class="attribution"><a class="source" href="https://www.rba.gov.au/publications/smp/2021/nov/economic-outlook.html">RBA, ABS</a></span>
</figcaption>
</figure>
<hr>
<p>Three per cent is still lower than the wage growth we had come to expect before it fell off a cliff with the end of the 2010s resources boom, and it’s still lower than the Reserve Bank needs to sustainably meet its inflation target.</p>
<p>But it holds out the prospect of an <a href="https://www.abs.gov.au/statistics/economy/price-indexes-and-inflation/wage-price-index-australia/jun-2021">improvement</a> at a time when private sector wages are already improving, which is what matters for the way people feel.</p>
<h2>Forecasts have consequences</h2>
<p>Economic growth – the catch-all measure for what’s happening in the economy – is set to climb out of the lockdown slump and <a href="https://www.rba.gov.au/publications/smp/2021/nov/economic-outlook.html">accelerate</a> throughout next year before settling back to the 2-3% that was common before the recession.</p>
<p>It also won’t be good enough, but it will be moving in the right direction, and accelerating strongly next May, at the time we are likely to be asked to vote.</p>
<p>These forecasts matter because similar ones (prepared by the Treasury instead of the Reserve Bank) will underpin the economic statement or budget released before the election and the <a href="https://www.finance.gov.au/publications/pre-election-economic-and-fiscal-outlook">Pre-election Economic and Fiscal Outlook</a> released by departmental secretaries without political input during the campaign.</p>
<p>They will become the accepted narrative.</p>
<h2>Easier home price growth</h2>
<p>After soaring a frightening 21% in the past year to barely affordable highs, there’s every chance home prices will ease off. On Melbourne Cup Tuesday, the Reserve Bank <a href="https://theconversation.com/australias-reserve-bank-signals-the-end-of-ultra-cheap-money-heres-what-it-will-mean-170928">withdrew</a> its support for the near-zero three year bond rate that banks had been using to fund ultra-cheap fixed rate mortgages.</p>
<p>It’s no longer possible to get a three-year fixed rate mortgage for less than 2%.</p>
<p>A few weeks earlier the Australian Prudential Regulation Authority instructed lenders to refuse mortgages to borrowers who couldn’t withstand an increase in mortgage rates of <a href="https://theconversation.com/thanks-to-apra-its-about-to-become-harder-to-get-a-mortgage-heres-why-169346">three percentage points</a> (such as an increase from 3% to 6%).</p>
<p>APRA expects the instruction to cut the maximum that can be borrowed by 5%. By election day price rises might have slowed or stopped.</p>
<h2>And low rates for some time yet</h2>
<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/430973/original/file-20211109-25-8e86lj.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/430973/original/file-20211109-25-8e86lj.png?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/430973/original/file-20211109-25-8e86lj.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=971&fit=crop&dpr=1 600w, https://images.theconversation.com/files/430973/original/file-20211109-25-8e86lj.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=971&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/430973/original/file-20211109-25-8e86lj.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=971&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/430973/original/file-20211109-25-8e86lj.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=1220&fit=crop&dpr=1 754w, https://images.theconversation.com/files/430973/original/file-20211109-25-8e86lj.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=1220&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/430973/original/file-20211109-25-8e86lj.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=1220&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
<span class="attribution"><a class="source" href="https://www.rba.gov.au/publications/smp/2021/nov/pdf/statement-on-monetary-policy-2021-11.pdf">Friday's RBA quarterly statement.</a></span>
</figcaption>
</figure>
<p>Higher variable mortgage rates would unsettle Australians (even though many are finding it <a href="https://www.rba.gov.au/publications/submissions/housing-and-housing-finance/inquiry-into-housing-affordability-and-supply-in-australia/pdf/inquiry-into-housing-affordability-and-supply-in-australia.pdf">easier</a> to make their payments than they have in years). </p>
<p>The good news is that on Friday the Reserve Bank nominated <a href="https://www.rba.gov.au/publications/smp/2021/nov/overview.html">2024</a> as the year it expects to begin to lift the record-low cash rate that sets the price of variable rate mortgages. </p>
<p>2024 is half a political cycle away.</p>
<p>Even if the first hike comes sooner (and financial markets <a href="https://theconversation.com/rba-says-its-a-w-shaped-recovery-with-housing-one-of-the-few-concerns-170716">expect</a> it to come sooner) it won’t be imminent at the time we will be asked to vote.</p>
<p>All sorts of things determine election outcomes. </p>
<p>The economy is only one. But right now, next year’s economy is looking good.</p><img src="https://counter.theconversation.com/content/171406/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Peter Martin does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Jobs, economic growth, wages growth and even home price growth are likely to look less threatening by the time we are asked to vote.Peter Martin, Visiting Fellow, Crawford School of Public Policy, Australian National UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1707162021-11-05T06:24:57Z2021-11-05T06:24:57ZRBA says it’s a W-shaped recovery, with housing one of the few concerns<figure><img src="https://images.theconversation.com/files/430451/original/file-20211105-21-1ma0xau.jpg?ixlib=rb-1.1.0&rect=631%2C151%2C1533%2C970&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">RBA/The Conversation</span></span></figcaption></figure><p>The Reserve Bank has used Friday’s quarterly assessment of the economy to declare that lockdowns have “<a href="https://www.rba.gov.au/publications/smp/2021/nov/">delayed but not derailed</a>” Australia’s recovery.</p>
<p>It says economic activity probably contracted 2.5% in the three months to September, but the December quarter (the one we are in now) will regain most of what was lost, leaving the economy recovering much as it would have were it not for the mid-year lockdowns.</p>
<p>Taken together with last year’s descent into recession and quick bounce back it paints a picture of a W-shaped recovery, even on what the Bank has graphed as its “downside” scenario.</p>
<hr>
<h2>Reserve Bank GDP forecasts</h2>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/430448/original/file-20211105-15-erb0g1.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/430448/original/file-20211105-15-erb0g1.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=364&fit=crop&dpr=1 600w, https://images.theconversation.com/files/430448/original/file-20211105-15-erb0g1.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=364&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/430448/original/file-20211105-15-erb0g1.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=364&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/430448/original/file-20211105-15-erb0g1.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=457&fit=crop&dpr=1 754w, https://images.theconversation.com/files/430448/original/file-20211105-15-erb0g1.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=457&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/430448/original/file-20211105-15-erb0g1.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=457&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Index numbers, December 2019 = 100.</span>
<span class="attribution"><a class="source" href="https://www.rba.gov.au/publications/smp/2021/nov/economic-outlook.html">RBAABS; RBA</a></span>
</figcaption>
</figure>
<hr>
<p>As a sign of emerging confidence it points to an increase in the number of people prepared to change jobs because they are looking for something better or different. </p>
<p>It says this is partly a bounce back from the start of the COVID recession when workers appeared to put plans they might have had to change jobs on hold.</p>
<hr>
<h2>Reasons people left jobs in past three months</h2>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/430444/original/file-20211105-21-1nrh6dd.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/430444/original/file-20211105-21-1nrh6dd.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/430444/original/file-20211105-21-1nrh6dd.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=318&fit=crop&dpr=1 600w, https://images.theconversation.com/files/430444/original/file-20211105-21-1nrh6dd.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=318&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/430444/original/file-20211105-21-1nrh6dd.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=318&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/430444/original/file-20211105-21-1nrh6dd.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=399&fit=crop&dpr=1 754w, https://images.theconversation.com/files/430444/original/file-20211105-21-1nrh6dd.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=399&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/430444/original/file-20211105-21-1nrh6dd.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=399&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
<span class="attribution"><a class="source" href="https://www.rba.gov.au/publications/smp/2021/nov/domestic-economic-conditions.html">RBA, ABS</a></span>
</figcaption>
</figure>
<hr>
<p>The Bank is concerned about property markets at home and abroad.</p>
<p>It says the possible collapse of the large and highly leveraged Chinese developer Evergrande might “lead to a significant slowdown in the Chinese economy”. </p>
<p>Average home prices have reached fresh highs in most Australian cities.</p>
<hr>
<h2>Median Australian home prices</h2>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/430446/original/file-20211105-16-1xk9y27.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/430446/original/file-20211105-16-1xk9y27.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/430446/original/file-20211105-16-1xk9y27.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=330&fit=crop&dpr=1 600w, https://images.theconversation.com/files/430446/original/file-20211105-16-1xk9y27.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=330&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/430446/original/file-20211105-16-1xk9y27.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=330&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/430446/original/file-20211105-16-1xk9y27.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=415&fit=crop&dpr=1 754w, https://images.theconversation.com/files/430446/original/file-20211105-16-1xk9y27.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=415&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/430446/original/file-20211105-16-1xk9y27.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=415&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Seasonally adjusted, log scale.</span>
<span class="attribution"><a class="source" href="https://www.rba.gov.au/publications/smp/2021/nov/domestic-economic-conditions.html">CoreLogic,RBA</a></span>
</figcaption>
</figure>
<hr>
<p>It says while interest payments have declined by around one percentage point of disposable income since March 2020 because of lower interest rates, the financial system faces risks associated with high and rising household indebtedness.</p>
<p>While it says mortgage rates will climb, and while financial market pricing implies quite rapid increases in the Bank’s cash rate, it doesn’t expect to lift the rate until 2024 (which is the year after Governor Philip Lowe’s term is due to end, raising the prospect of him completing his seven-year term without once lifting rates).</p>
<hr>
<p><strong>Implied market cash rate forecasts</strong></p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/430447/original/file-20211105-13-186l2w0.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/430447/original/file-20211105-13-186l2w0.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/430447/original/file-20211105-13-186l2w0.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=301&fit=crop&dpr=1 600w, https://images.theconversation.com/files/430447/original/file-20211105-13-186l2w0.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=301&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/430447/original/file-20211105-13-186l2w0.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=301&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/430447/original/file-20211105-13-186l2w0.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=378&fit=crop&dpr=1 754w, https://images.theconversation.com/files/430447/original/file-20211105-13-186l2w0.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=378&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/430447/original/file-20211105-13-186l2w0.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=378&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
<span class="attribution"><a class="source" href="https://www.rba.gov.au/publications/smp/2021/nov/domestic-financial-conditions.html">Bloomberg; RBA</a></span>
</figcaption>
</figure>
<hr>
<p>The Bank has consistently said it will “not increase the cash rate until actual inflation is <a href="https://www.rba.gov.au/education/resources/explainers/australias-inflation-target.html">sustainably within</a> the 2–3% target range”.</p>
<p>It has also said it is not enough for inflation to be <a href="https://www.rba.gov.au/speeches/2020/pdf/sp-gov-2020-11-03.pdf">merely forecast</a> to be within the range, creating a high bar for action.</p>
<p>Although at <a href="https://www.abs.gov.au/statistics/economy/price-indexes-and-inflation/consumer-price-index-australia/latest-release">2.1%</a> over the year underlying inflation is the highest it has been since 2015, it is still towards the bottom of the Bank’s target band.</p>
<h2>Inflation weaker than it looks</h2>
<p>And the rate reflects some temporary factors. Some of it is due to the rebound in petrol prices as demand has picked up as people have returned to work, something that won’t continue.</p>
<p>The Bank expects underlying inflation over the course of 2022 to be 2.25%. Although well above the previous forecast of 1.75%, it is below the mid point of its target.</p>
<p>It doesn’t expect inflation of 2.5% until 2023, suggesting no rate hike until then.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/reserve-bank-not-for-turning-no-rate-hike-until-unemployment-near-4-5-154560">Reserve Bank not for turning. No rate hike until unemployment near 4.5%</a>
</strong>
</em>
</p>
<hr>
<p>The labour market outlook is little changed from the Bank’s August statement. It expects unemployment to fall to a historic low 4.25% by the end of 2022 and then to 4% in 2023. </p>
<p>Even then, in 2023, it expects only modest wage growth of 3%, doing little to support the sustainably higher inflation it says it would need to see before it lifts rates.</p><img src="https://counter.theconversation.com/content/170716/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>John Hawkins is a former economic forecaster in the Reserve Bank and Treasury.</span></em></p>In its quarterly statement on the economy the Bank is at pains to suggest it won’t be lifting interest rates quickly.John Hawkins, Senior Lecturer, Canberra School of Politics, Economics and Society and NATSEM, University of CanberraLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1601712021-05-07T07:27:23Z2021-05-07T07:27:23ZVital Signs: The RBA wants to cut unemployment, and nothing — not even soaring home prices — will stand in its way<p>Ahead of the definitive official read of the economy from the treasury in the budget on <a href="https://budget.gov.au/index.htm">Tuesday</a>, the Reserve Bank has given us two special insights into its own thinking in the space of 14 hours.</p>
<p>They suggest that (first) the economy is improving, and (second) the bank is not going to let up on driving that improvement, not for anything — including concern about climbing home prices — until it has pushed unemployment down and wage growth back up to where it believes it should be.</p>
<p>The first insight was in Deputy Governor Guy Debelle’s <a href="https://www.rba.gov.au/speeches/2021/sp-dg-2021-05-06.html">Shann Memorial Lecture</a> on Thursday night. The second was in Friday’s <a href="https://www.rba.gov.au/publications/smp/2021/may/pdf/statement-on-monetary-policy-2021-05.pdf">Statement on Monetary Policy</a></p>
<h2>Growth without inflation</h2>
<p>The statement emphasised that the although the bank expects economic growth to bounce back fairly strongly, getting inflation back within the bank’s 2-3% target band and getting wages growth up will take much longer </p>
<p>As the statement put it:</p>
<blockquote>
<p>despite the stronger outlook for output and the labour market, inflation and wages growth are expected to remain low, picking up only gradually. </p>
</blockquote>
<p>On one measure just <a href="https://www.abs.gov.au/statistics/economy/price-indexes-and-inflation/consumer-price-index-australia/latest-release">1.1%</a>, the lowest on record, underlying inflation is to climb to 1.5% over the course of 2021 before gradually climbing to close to 2% by mid 2023. </p>
<p>It’s well short of the bank’s target of 2-3% which is only likely to be achieved with much higher wages growth driven by much deeper inroads into unemployment.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/josh-frydenberg-has-the-opportunity-to-transform-australia-permanently-lowering-unemployment-156175">Josh Frydenberg has the opportunity to transform Australia, permanently lowering unemployment</a>
</strong>
</em>
</p>
<hr>
<p>Those inroads will be easier to achieve if COVID is firmly under control.</p>
<p>The bank explicitly linked its forecasts of an improving economy to an assumption that Australia’s vaccine rollout accelerates in the second half of the year. It could have added to that (but didn’t) the importance of getting purpose-built quarantine facilities up and running. </p>
<p>Its baseline forecast has economic growth of 4% in the year to June 2022 and 3% in the year to June 2023. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/399417/original/file-20210507-15-7cn93m.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/399417/original/file-20210507-15-7cn93m.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/399417/original/file-20210507-15-7cn93m.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=389&fit=crop&dpr=1 600w, https://images.theconversation.com/files/399417/original/file-20210507-15-7cn93m.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=389&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/399417/original/file-20210507-15-7cn93m.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=389&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/399417/original/file-20210507-15-7cn93m.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=489&fit=crop&dpr=1 754w, https://images.theconversation.com/files/399417/original/file-20210507-15-7cn93m.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=489&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/399417/original/file-20210507-15-7cn93m.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=489&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
<span class="attribution"><a class="source" href="https://www.rba.gov.au/publications/smp/2021/may/">RBA Statement on Monetary Policy, May 7 2021</a></span>
</figcaption>
</figure>
<p>But there is a fairly wide range around its downside and upside scenarios.</p>
<p>Economic growth might be as low as 2.5% or as high as 5% in 2022 and as low as 2% and as high as 3% in 2023.</p>
<p>Similarly, the unemployment forecast is somewhere between 4.25% and 5.25% by June 2022 and in a very wide range of 3.75% and 5.5% by June 2023. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/399415/original/file-20210507-15-1ec53h5.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/399415/original/file-20210507-15-1ec53h5.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/399415/original/file-20210507-15-1ec53h5.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=398&fit=crop&dpr=1 600w, https://images.theconversation.com/files/399415/original/file-20210507-15-1ec53h5.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=398&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/399415/original/file-20210507-15-1ec53h5.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=398&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/399415/original/file-20210507-15-1ec53h5.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=500&fit=crop&dpr=1 754w, https://images.theconversation.com/files/399415/original/file-20210507-15-1ec53h5.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=500&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/399415/original/file-20210507-15-1ec53h5.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=500&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
<span class="attribution"><a class="source" href="https://www.rba.gov.au/publications/smp/2021/may/">RBA Statement on Monetary Policy, May 7 2021</a></span>
</figcaption>
</figure>
<p>These forecasts produce below-target inflation forecasts of between 1.5% and 2% in June 2022 and 1.5% to 2.25% in June 2023.</p>
<p>What the bank will do to help drive the upside scenario, and what else will need to happen, was laid out by Debelle in Thursday night’s <a href="https://www.rba.gov.au/speeches/2021/sp-dg-2021-05-06.html">Shann Memorial Lecture</a>.</p>
<h2>The Debelle Doctrine</h2>
<p>Adjectives like “seminal” are bandied about liberally these days, but for me, Debelle’s speech on <a href="https://www.rba.gov.au/speeches/2021/sp-dg-2021-05-06.html">Monetary Policy During COVID</a> was a masterpiece.</p>
<p>He began by outlining the suite of measures the bank introduced from the beginning of the pandemic in March 2020. They involved</p>
<ul>
<li><p>cutting the cash rate to a record low of 0.25% and then cutting it again to 0.1%</p></li>
<li><p>undertaking to not increase the cash rate target until the bank is confident that inflation will be sustainably within the 2–3% target band</p></li>
<li><p>cutting the rate paid on private banks’ exchange settlement balances with the bank to 0.1% and then to 0.0%</p></li>
<li><p>buying enough three-year government bonds to target a yield of 0.25%, later <a href="https://theconversation.com/5-ways-the-reserve-bank-is-going-to-bat-for-australia-like-never-before-149311">0.1%</a></p></li>
<li><p>guaranteeing to buy $5 billion of five-year and ten-year state and Commonwealth week-in week-out <a href="https://theconversation.com/5-ways-the-reserve-bank-is-going-to-bat-for-australia-like-never-before-149311">whatever the economic circumstances</a></p></li>
<li><p>buying bonds as needed to address the “dysfunction” in the bond market</p></li>
<li><p>offering banks cheap lending finance through a new <a href="https://www.rba.gov.au/mkt-operations/term-funding-facility/overview.html">term funding facility</a> </p></li>
<li><p>ensuring that the financial system has sufficient liquidity</p></li>
</ul>
<p>Debelle methodically described how each of these measures are likely to flow through into economic activity.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/exclusive-top-economists-back-unemployment-rate-beginning-with-4-159989">Exclusive. Top economists back unemployment rate beginning with '4'</a>
</strong>
</em>
</p>
<hr>
<p>That is, he articulated what economists call the “transmission mechanism” — how the measures work.</p>
<p>As an example, the following chart he provided summarises the transmission mechanism for bond purchases.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/399424/original/file-20210507-21-1fix0jo.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/399424/original/file-20210507-21-1fix0jo.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/399424/original/file-20210507-21-1fix0jo.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=626&fit=crop&dpr=1 600w, https://images.theconversation.com/files/399424/original/file-20210507-21-1fix0jo.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=626&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/399424/original/file-20210507-21-1fix0jo.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=626&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/399424/original/file-20210507-21-1fix0jo.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=787&fit=crop&dpr=1 754w, https://images.theconversation.com/files/399424/original/file-20210507-21-1fix0jo.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=787&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/399424/original/file-20210507-21-1fix0jo.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=787&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
</figcaption>
</figure>
<p>And then he delivered the setup for the punchline.</p>
<p>The tools the bank is using might affect all sorts of things, including house prices. But the bank plans to focus on just one thing — getting unemployment down until it gets inflation back up to its target band.</p>
<p>Then the punchline itself: the bank will do this <em>even if</em> it leads to higher house prices</p>
<blockquote>
<p>there are a number of tools that can be used to address the issue. But I do not think that monetary policy is one of the tools. Monetary policy is focussed on supporting the economic recovery and achieving its goals in terms of employment and inflation</p>
</blockquote>
<p>It was important to remember that while housing prices <em>may</em> not rise as fast without low interest rates, unemployment would <em>definitely</em> be materially higher without low interest rates. </p>
<p>Unemployment has serious consequences.</p>
<h2>What it all means</h2>
<p>The Debelle Doctrine is that the bank will focus on a narrow range of objectives, and will not be timid about using the tools in its arsenal to achieve them.</p>
<p>This may not be a seismic shift, but it is significant. </p>
<p>It gives the bank a much clearer focus; it gives others a much better way to judge how it is performing; and it makes clear that if the government is concerned about rising house prices, it’ll have to do something itself (perhaps by tightening the tax rules governing capital gains and negative gearing).</p>
<p>Debelle produced a clear, precise, and authoritative statement of what the Reserve Bank can, should, and will do.</p>
<p>In a word, it was gubernatorial.</p><img src="https://counter.theconversation.com/content/160171/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Richard Holden is affiliated President-elect of the Academy of the Social Sciences in Australia.</span></em></p>The bank’s decision to focus on just one thing puts the onus on the government to take action to rein in home prices.Richard Holden, Professor of Economics, UNSW SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1267342019-11-18T19:20:20Z2019-11-18T19:20:20ZPlease, no more projections. What we need are predictions, and they’re harder<figure><img src="https://images.theconversation.com/files/302098/original/file-20191118-66953-1c5po78.jpg?ixlib=rb-1.1.0&rect=98%2C70%2C1127%2C481&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Projections are often be repeatedly wrong. That's because the models don't learn from mistakes.</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><blockquote>
<p>It is difficult to make predictions, especially about the future. (attributed to Danish physicist Niels Bohr)</p>
</blockquote>
<p>The difficulty of making predictions has long been known, but the rise of the internet means that it is getting harder to hide the gaps between predictions and reality.</p>
<p>Perhaps the most significant example of repeated failed projections has been the International Energy Agency’s projections of the importance of renewable power – the proportion of electricity generated by solar and wind and other renewable sources other than hydro. </p>
<p>Beginning in 1994, when generation from these sources was negligible, the Agency has produced estimates of the future share of renewables every two years. </p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/getting-projections-right-predicting-future-climate-1936">Getting projections right: predicting future climate</a>
</strong>
</em>
</p>
<hr>
<p>Every two years, with striking regularity, the previous estimates have been exceeded (hugely) and the new set has been revised upwards. But never by enough. Each time the upward revision has been inadequate.</p>
<p>This graph, prepared by <a href="https://www.quora.com/q/xwpxpfefwalgifkr/A-modest-proposal-to-the-International-Energy-Authority">Paul Mainwood</a> from IEA reports, illustrates the point:</p>
<hr>
<h2>Projections versus reality</h2>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/302056/original/file-20191117-66945-19v9ijz.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/302056/original/file-20191117-66945-19v9ijz.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/302056/original/file-20191117-66945-19v9ijz.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=285&fit=crop&dpr=1 600w, https://images.theconversation.com/files/302056/original/file-20191117-66945-19v9ijz.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=285&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/302056/original/file-20191117-66945-19v9ijz.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=285&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/302056/original/file-20191117-66945-19v9ijz.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=359&fit=crop&dpr=1 754w, https://images.theconversation.com/files/302056/original/file-20191117-66945-19v9ijz.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=359&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/302056/original/file-20191117-66945-19v9ijz.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=359&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Reality versus repeated projections of renewables share of electricity generation (ex hydro).</span>
<span class="attribution"><a class="source" href="https://www.quora.com/q/xwpxpfefwalgifkr/A-modest-proposal-to-the-International-Energy-Authority">Paul Mainwood, Quora</a></span>
</figcaption>
</figure>
<hr>
<p>The dashed lines represent successive projections from 1994 to 2016. </p>
<p>The solid red line represents the actual growth of non-hydro renewables as a share of total electricity generation. </p>
<p>What can be seen is that eleven times in a row the projected growth in renewables was far too low and had to be upgraded. Eleven times in a row the upgrades weren’t big enough.</p>
<p>As a joke (indicated by the green line) Mainwood “corrected” the 2016 projection for the typical under-projection: </p>
<hr>
<h2>Projections plus “corrected” 2016 projection</h2>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/302067/original/file-20191117-66953-1tfh6u0.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/302067/original/file-20191117-66953-1tfh6u0.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/302067/original/file-20191117-66953-1tfh6u0.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=328&fit=crop&dpr=1 600w, https://images.theconversation.com/files/302067/original/file-20191117-66953-1tfh6u0.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=328&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/302067/original/file-20191117-66953-1tfh6u0.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=328&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/302067/original/file-20191117-66953-1tfh6u0.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=412&fit=crop&dpr=1 754w, https://images.theconversation.com/files/302067/original/file-20191117-66953-1tfh6u0.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=412&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/302067/original/file-20191117-66953-1tfh6u0.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=412&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Reality versus projections of renewables share of electricity generation (ex hydro) plus 2016 projection corrected for typical undershoot.</span>
<span class="attribution"><a class="source" href="https://www.quora.com/q/xwpxpfefwalgifkr/A-modest-proposal-to-the-International-Energy-Authority">Paul Mainwood</a></span>
</figcaption>
</figure>
<hr>
<h2>Projections often understate change</h2>
<p>Another striking example relates to religious belief. In 2015 the Pew Research Institute released a <a href="https://www.pewforum.org/2015/04/02/religious-projections-2010-2050/">report</a> suggesting a gradual decline in Christianity in the United States.</p>
<p>The headline finding for the US: </p>
<blockquote>
<p>Christians will decline from more than three-quarters (75%) of the population in 2010 to two-thirds (66%) in 2050. </p>
</blockquote>
<p>Yet only four years later in 2019, Pew released another report with this headline finding about the US:</p>
<blockquote>
<p>In 2018 and 2019, 65% of American adults describe themselves as Christians when asked about their religion, down 12 percentage points over the past decade. </p>
</blockquote>
<p>Thus, a decline expected to take forty years had taken place inside ten.</p>
<p>Moreover, Christian affiliation is highest in the older age cohorts, very few members of which will be around in 2050. Looking at the younger cohort born after 1981, only 49% claim a Christian affiliation, a proportion that has declined by 16 percentage points in a decade. Unless that trend is rapidly reversed, or later cohorts experience a religious revival, Christians will be a minority well before 2050.</p>
<h2>They enable modellers to escape responsiblity</h2>
<p>Faced with outcomes of this kind, modellers often defend themselves by drawing a distinction between “predictions” and “projections”. </p>
<p>A prediction (Latin for “foretelling”) is a claim about what is most likely to happen in the future. By contrast, a projection (“casting forward”) is a model output derived by extrapolating past trends, holding some parameters constant and allowing others to vary.</p>
<p>The International Energy Agency projections were characterised by the assumption that the costs of renewable energy would change only slowly, rather than continuing the extraordinary decline that began in the 1970s. </p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/a-radical-idea-to-get-a-high-renewable-electric-grid-build-way-more-solar-and-wind-than-needed-113635">A radical idea to get a high-renewable electric grid: Build way more solar and wind than needed</a>
</strong>
</em>
</p>
<hr>
<p>In the case of the Pew projections, the crucial parameter is conversion rates – the frequency with which people brought up with one religion (including “no religion”) change to another. The Pew projections were based on the assumption conversion rates will remain unchanged. </p>
<p>It is the opposite of the widely-held but controversial “secularisation hypothesis” which states that modernisation leads to increased conversions to “no religion”. </p>
<h2>Predictions force them to take responsiblity</h2>
<p>Projections are useful in the development of models. All models are based on past experience and have to assume that in some respects the future will be like the past. By examining the projections generated under particular assumptions about which variables and parameters will remain constant, it is possible to understand how models works and make modelling choices.</p>
<p>But projections of this kind are of no use in informing people not familiar with the material. They mislead casual readers of the Australia’s budget.</p>
<p>The budget uses both predictions and projections. </p>
<p>For the two years following each budget the Commonwealth uses “forecasts” which it is prepared to stand by, then for the next two it presents mechanical “projections”:</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/302072/original/file-20191117-66957-w8vxaq.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/302072/original/file-20191117-66957-w8vxaq.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=269&fit=crop&dpr=1 600w, https://images.theconversation.com/files/302072/original/file-20191117-66957-w8vxaq.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=269&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/302072/original/file-20191117-66957-w8vxaq.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=269&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/302072/original/file-20191117-66957-w8vxaq.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=338&fit=crop&dpr=1 754w, https://images.theconversation.com/files/302072/original/file-20191117-66957-w8vxaq.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=338&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/302072/original/file-20191117-66957-w8vxaq.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=338&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption"></span>
<span class="attribution"><a class="source" href="https://www.budget.gov.au/2019-20/content/bp1/index.htm">2019-20 Commonwealth budget, Budget Paper 1</a></span>
</figcaption>
</figure>
<p>When asked to defend (for example) its wage growth number of 3½%, the treasury points out that it is a mechanical projection rather than a forecast, a distinction lost on all but the most enthusiastic of budget devotees.</p>
<p>In practice it is impossible to separate the two.</p>
<p>Even though both the International Energy Association and Pew describe their estimates as “projections” they are almost invariably <a href="https://www.mining.com/new-iea-report-predicts-surge-in-global-coal-use-2/">treated as</a> <a href="https://www.pri.org/stories/future-religion-around-world-one-chart">predictions</a>. </p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/vital-signs-dismal-wages-growth-makes-a-joke-of-budget-forecasts-77870">Vital Signs: dismal wages growth makes a joke of budget forecasts</a>
</strong>
</em>
</p>
<hr>
<p>Since any statement about the future will be treated as a prediction, the only serious option for modellers prepared to be truthful with the public is to bite the bullet and make predictions. </p>
<p>It means working hard to make the best possible estimate of the future paths of all model parameters, and using judgement to take account of everything else.</p>
<p>It’s what those of us looking to experts for guidance deserve.</p><img src="https://counter.theconversation.com/content/126734/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>John Quiggin does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>From wage growth to renewable energy to religion, projections are being treated as predictions. We’d be better off insisting on genuine forecasts.John Quiggin, Professor, School of Economics, The University of QueenslandLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1216902019-08-09T08:10:18Z2019-08-09T08:10:18ZRBA update: Governor Lowe points to even lower rates<p>Reserve Bank Governor Philip Lowe has said two things about unemployment in the past few weeks. Together, they lead to an inescapable conclusion.</p>
<p>The first was in a speech in <a href="https://www.rba.gov.au/speeches/2019/sp-gov-2019-05-21.html">May</a>, expanded on in a speech in <a href="https://www.rba.gov.au/speeches/2019/sp-gov-2019-06-20.html">June</a>. At both times the published unemployment rate was 5.2%.</p>
<p>Lowe said in May that while the Reserve Bank had long thought an unemployment rate of 5% was the best that could be achieved without generating worrying inflation, that view has now changed:</p>
<blockquote>
<p>From today’s perspective, I think we can do better than this. My judgement of the accumulating evidence is that the Australian economy can support an unemployment rate of below 5% without raising inflation concerns.</p>
</blockquote>
<p>It was good news. And then it got better.</p>
<p>In June he put a number on how low the unemployment rate could go before inflation became a concern:</p>
<blockquote>
<p>While it is not possible to pin the number down exactly, the evidence is consistent with an estimate below 5%, perhaps around 4.5%. Given that the current unemployment rate is 5.2%, this suggests that there is still spare capacity in our labour market.</p>
</blockquote>
<p>The Reserve Bank should be able to cut interest rates until unemployment fell below 5% and approached 4.5% without worrying about inflation, Lowe argued.</p>
<p>And in May, in a report back from a board meeting, he made it clear that’s what he would do:</p>
<blockquote>
<p>At that meeting, we discussed a scenario in which there was no further improvement in the labour market and the unemployment rate remained around the 5% mark. In this scenario, we judged that inflation was likely to remain low relative to the target and that a decrease in the cash rate would likely be appropriate.</p>
</blockquote>
<p>It would likely be appropriate to cut interest rates and keep cutting until the unemployment rate was driven below 5%, continuing to cut until it approached 4.5%.</p>
<p>Today, appearing before the House of Representatives economics committee in Canberra with the unemployment rate still stuck at 5.2% despite two consecutive rate cuts, he delivered what on the face of it was bad news.</p>
<p>He said the bank’s central forecast was that the unemployment rate would stay above 5% again <a href="https://rba.gov.au/speeches/2019/sp-gov-2019-08-09.html">until 2021</a>. That’s right, 2021.</p>
<p>But taking the two statements together, it is reasonable to conclude that the Reserve Bank will keep cutting rates until unemployment does fall below 5%. In other words, it will keep cutting rates until 2021.</p>
<h2>Lowe ain’t done cutting…</h2>
<p>Indeed, the Reserve Bank’s <a href="https://rba.gov.au/publications/smp/2019/aug/pdf/economic-outlook.pdf">quarterly forecasts update</a>, released as Lowe spoke, countenances that happening. As foreshadowed by the governor, it forecasts that the unemployment rate won’t fall back to 5% until June 2021.</p>
<p>And it contains several other unwelcome forecasts: economic growth of just 2.5% this year, down from a previously forecast 2.75%, and very weak inflation this year of just 1.75%, down from a previously forecast 2%.</p>
<hr>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/287473/original/file-20190809-144888-lxfnms.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/287473/original/file-20190809-144888-lxfnms.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/287473/original/file-20190809-144888-lxfnms.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=243&fit=crop&dpr=1 600w, https://images.theconversation.com/files/287473/original/file-20190809-144888-lxfnms.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=243&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/287473/original/file-20190809-144888-lxfnms.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=243&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/287473/original/file-20190809-144888-lxfnms.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=306&fit=crop&dpr=1 754w, https://images.theconversation.com/files/287473/original/file-20190809-144888-lxfnms.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=306&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/287473/original/file-20190809-144888-lxfnms.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=306&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
<span class="attribution"><a class="source" href="https://www.rba.gov.au/publications/smp/2019/aug/">RBA Statement on Monetary Policy, August 9, 2019</a></span>
</figcaption>
</figure>
<hr>
<p>But here’s the thing. All of those forecasts were compiled, as is the Reserve Bank’s custom, by taking into account not only the two interest rate cuts that have already happened (and have taken the bank’s cash rate down to an all-time low of 1%), but also two more yet to be delivered.</p>
<p>It is explained in the footnote: </p>
<blockquote>
<p>Technical assumptions set on 7 August include the cash rate moving in line with market pricing.</p>
</blockquote>
<p>The “market pricing” is the consensus of the bets placed on the futures market for what the Reserve Bank is going to do to its cash rate.</p>
<p>The consensus is for another cut of 0.25% in October and then another cut of 0.25% in February, taking the cash rate down to yet another all-time low of just 0.5%.</p>
<hr>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/287484/original/file-20190809-144838-1xymcob.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/287484/original/file-20190809-144838-1xymcob.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/287484/original/file-20190809-144838-1xymcob.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=215&fit=crop&dpr=1 600w, https://images.theconversation.com/files/287484/original/file-20190809-144838-1xymcob.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=215&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/287484/original/file-20190809-144838-1xymcob.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=215&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/287484/original/file-20190809-144838-1xymcob.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=270&fit=crop&dpr=1 754w, https://images.theconversation.com/files/287484/original/file-20190809-144838-1xymcob.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=270&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/287484/original/file-20190809-144838-1xymcob.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=270&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
<span class="attribution"><a class="source" href="https://www.asx.com.au/prices/targetratetracker.htm">ASX target rate tracker</a></span>
</figcaption>
</figure>
<hr>
<p>The Reserve Bank is normally at pains to point out that this is a mere technical assumption, not a guarantee of how it will move rates. But the awful truth is that its forecasts imply that unless it cut rates two more times in coming months, unemployment won’t fall to 5% by 2021, and inflation will be even weaker than the incredibly weak 1.75% it is forecasting.</p>
<h2>…and he might not stop at zero</h2>
<p>Two more cuts in its cash rate will take it to 0.5%, close to zero.</p>
<p>Lowe revealed that the Reserve Bank is investigating so-called “unconventional” monetary policy or <a href="https://parlinfo.aph.gov.au/parlInfo/download/committees/commrep/eea5d0b8-72e9-4b5e-acf8-52ed46888ced/toc_pdf/Standing%20Committee%20on%20Economics_2019_08_09_7100.pdf;fileType=application%2Fpdf">quantitative easing</a> that would have the same effect as taking the cash rate below zero.</p>
<p>“It is prudent for us to have done the work in advance to see what we would do – it’s really contingency planning,” he said.</p>
<p>Rates might go to zero, or below, worldwide because right now there is a worldwide glut of savings, and not enough investment. </p>
<blockquote>
<p>The reality we face is that, if a lot of people want to save and not many people want to use those savings to build new capital, savers are going to get low returns. We can move our interest rates around this new structurally lower level,but we can’t escape the fact that global interest rates are low.</p>
</blockquote>
<p>The Reserve Bank’s best case is that its Australian forecasts are wrong - that unemployment actually falls and that inflation, wage growth and economic growth climb.</p>
<p>There’s a respectable view within the bank that this might happen. Its forecasts take into account a range of positive influences, including lower interest rates, the recent tax cuts, the depreciation of the Australian dollar, a brighter outlook for investment in the resources sector, some stabilisation in the housing market, and ongoing high levels of investment in infrastructure. </p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/below-zero-is-reverse-how-the-reserve-bank-would-make-quantitative-easing-work-118843">Below zero is ‘reverse’. How the Reserve Bank would make quantitative easing work</a>
</strong>
</em>
</p>
<hr>
<p>But they are the result of a mechanical model that takes them into account individually. The governor’s hope is that, taken together, they will achieve more than is forecast.</p>
<p>He would like governments themselves to push things along, starting with the wages they pay their own employees, and he is becoming ever more bold about saying so:</p>
<blockquote>
<p>Most public sectors have wage caps of 2.5%, some have 1.5%, I think in Western Australia it’s probably even lower. I can understand why governments are doing that. On the other hand, the wage caps in the public sector are cementing low wage norms across the country. Over time, I hope the whole system, including the public sector, could see wages rising at three point something.</p>
</blockquote>
<p>He is as good as powerless to stop what he regards as a worldwide investment strike caused by the trade and technology disputes between the United States and China. </p>
<blockquote>
<p>These disputes pose a significant risk to the global economy. Not only are they disrupting trade flows, but they are also generating considerable uncertainty for many businesses around the world. Worryingly, this uncertainty is leading to investment plans being postponed or reconsidered.</p>
</blockquote>
<p>Lowe doesn’t believe further interest rate cuts would to do much to encourage businesses to invest, or to encourage home buyers to borrow.</p>
<p>But he is certain they will help in other ways.</p>
<p>They will lower the exchange rate, making Australian goods and services more competitive, and that they will free up the cash of Australians who already have home loans, what he calls the “cash flow” channel:</p>
<blockquote>
<p>There is no evidence that has become less effective. It is certainly true that in the current environment, at least in my view, monetary policy is less effective than it used to be. In today’s environment people don’t run off to the bank to borrow more when interest rates fall; they are more likely to pay back their mortgage more quickly. So that dynamic is different than it used to be.</p>
</blockquote>
<p>When he last appeared before the parliamentary committee in February he said the probabilities of rates going up and rates going down were <a href="https://parlinfo.aph.gov.au/parlInfo/download/committees/commrep/b9c7ee3a-c926-4f3e-acc4-cf5b8809f649/toc_pdf/Standing%20Committee%20on%20Economics_2019_02_22_6971_Official.pdf;fileType=application%2Fpdf#search=%22committees/commrep/b9c7ee3a-c926-4f3e-acc4-cf5b8809f649/0000%22">evenly balanced</a>. He didn’t say that today.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/buckle-up-2019-20-survey-finds-the-economy-weak-and-heading-down-and-thats-ahead-of-surprises-119455">Buckle up. 2019-20 survey finds the economy weak and heading down, and that's ahead of surprises</a>
</strong>
</em>
</p>
<hr>
<img src="https://counter.theconversation.com/content/121690/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Peter Martin does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The Reserve Bank’s best case scenario is that its forecasts are wrong.Peter Martin, Visiting Fellow, Crawford School of Public Policy, Australian National UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1194552019-06-30T11:58:58Z2019-06-30T11:58:58ZBuckle up. 2019-20 survey finds the economy weak and heading down, and that’s ahead of surprises<figure><img src="https://images.theconversation.com/files/281502/original/file-20190627-76701-1cldpad.png?ixlib=rb-1.1.0&rect=377%2C0%2C2868%2C2000&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">As uncertain as 2019-20 is, The Conversation's team of 20 leading economists are in broad agreement that the outlook isn't good. Scott Morrison and Treasurer Josh Frydenberg will also have to deal with the unexpected.</span> <span class="attribution"><span class="source">Wes Mountain/The Conversation</span>, <a class="license" href="http://creativecommons.org/licenses/by-nd/4.0/">CC BY-ND</a></span></figcaption></figure><p>During the election we were promised jobs and growth. But in 2019-20 The Conversation’s forecasting panel is predicting an economic growth rate as weak as any since the financial crisis, as well as dismal consumer spending, no improvement in unemployment or wage growth, and an increased chance of recession.</p>
<p>As in <a href="https://theconversation.com/no-surplus-no-share-market-growth-no-lift-in-wage-growth-economic-survey-points-to-bleaker-times-post-election-110315">January</a>, 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.</p>
<p>Whereas in January only <a href="https://theconversation.com/no-surplus-no-share-market-growth-no-lift-in-wage-growth-economic-survey-points-to-bleaker-times-post-election-110315">three</a> members of the 20-person panel expected the Reserve Bank to cut interest rates, and most expected an economic growth rate approaching 3% (which is the Treasury’s estimate of the <a href="http://treasury.gov.au/speech/the-macroeconomic-context">best that can be achieved</a> on a sustained basis), this time all but two expect the bank to cut again, and most expect a growth rate closer to 2% – one of the most anaemic since the financial crisis.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/no-surplus-no-share-market-growth-no-lift-in-wage-growth-economic-survey-points-to-bleaker-times-post-election-110315">No surplus, no share market growth, no lift in wage growth. Economic survey points to bleaker times post-election</a>
</strong>
</em>
</p>
<hr>
<p>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.</p>
<p>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.</p>
<h2>Economic growth</h2>
<p>The panel’s average forecast for year-on-year growth is 2.1%. 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%. </p>
<p>Respected forecasters including former Reserve Bank board member Warwick McKibbin and former OECD director Adrian Blundell-Wignall expect much lower growth than 2.1%. McKibbin expects 1.8%; Blundell-Wignall expects 1.5%. Only three of the panel’s 20 forecasts are close to Treasury’s. The rest are lower.</p>
<hr>
<p><iframe id="aWnro" class="tc-infographic-datawrapper" src="https://datawrapper.dwcdn.net/aWnro/9/" height="400px" width="100%" style="border: none" frameborder="0"></iframe></p>
<hr>
<p>Some panellists submitted forecasts for Chinese economic growth under sufferance. They made it clear they were forecasting “official” growth, not actual growth which they think is much lower. Even so, most expect official growth to slow as the trade war between the United States and China intensifies. Nigel Stapledon says unless it is reined in (and he thinks it will be) it could bring on recessions. </p>
<p>Other panellists including Rebecca Cassells say the impact of US tariffs on Chinese goods has so far been positive for Australia. China has responded by investing in infrastructure projects that need Australian iron ore and coal. This, together with reduced competition from other suppliers of iron ore after the collapse of a tailings dam and mine closures in Brazil, has lifted the price and volume of Australian exports to levels not seen for some time.</p>
<p>The panel expects robust United States growth of 2.6% 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%) is Blundell-Wignall, who until last year analysed world economies in his role as special advisor to the OECD secretary general.</p>
<h2>Living standards</h2>
<p>Jobs growth will disappoint both the Treasury, which has forecast unemployment of <a href="https://budget.gov.au/2019-20/content/overview.htm#our-plan">5%</a> by the end of the financial year, and Reserve Bank Governor Philip Lowe, who has adopted a target of “<a href="https://www.rba.gov.au/speeches/2019/sp-gov-2019-06-04.html">4 point something</a>”.</p>
<p>All but three of the 20-person panel expect the rate to stay above 5%. The average forecast is 5.3%, which is close to the present 5.2%.</p>
<p>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.</p>
<hr>
<p><iframe id="zj8xX" class="tc-infographic-datawrapper" src="https://datawrapper.dwcdn.net/zj8xX/6/" height="400px" width="100%" style="border: none" frameborder="0"></iframe></p>
<hr>
<p>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.</p>
<p>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% over the year to June 2020, after climbing 1.3% in the year to March. </p>
<p>Nominal GDP, which takes full account of mining revenue and drives company profits and the budget revenue, has grown 5% over the past year and is expected to grow 3% in the year ahead.</p>
<h2>The risk of recession</h2>
<p>The panel regards a recession as more likely <a href="https://theconversation.com/no-surplus-no-share-market-growth-no-lift-in-wage-growth-economic-survey-points-to-bleaker-times-post-election-110315">than it did in January</a>, assigning a 29% probability to a conventionally defined recession in the next two years, up from 25%.</p>
<p>Economic modeller Janine Dixon says the bulk of Australia’s recent economic growth has come from higher commodity prices via exports.</p>
<p>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.</p>
<hr>
<p><iframe id="4CaWD" class="tc-infographic-datawrapper" src="https://datawrapper.dwcdn.net/4CaWD/2/" height="400px" width="100%" style="border: none" frameborder="0"></iframe></p>
<hr>
<p>Former Treasury and ANZ Bank economist Warren Hogan says with consumers tightening their belts, an external shock could easily knock Australia into a recession. </p>
<p>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.</p>
<p>Debt theorist Steve Keen, who assigns a 95% probability 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.</p>
<p>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. </p>
<h2>Wages and prices</h2>
<p>The panel expects continued historically wage growth of only 2.2% in 2019-20, slightly weaker than the latest reading of 2.3% and well short of the budget forecast of 2.75%. If that average forecast is right, it will be the seventh consecutive year in which wage growth has <a href="https://theconversation.com/its-the-budget-cash-splash-that-reaches-back-in-time-114188">fallen short of the budget forecast</a>. </p>
<hr>
<p><iframe id="CvgGM" class="tc-infographic-datawrapper" src="https://datawrapper.dwcdn.net/CvgGM/6/" height="400px" width="100%" style="border: none" frameborder="0"></iframe></p>
<hr>
<p>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%, or 1.4% on the so-called “underlying” basis watched closely by the Reserve Bank.</p>
<p>The bad news for the Reserve Bank is that it will put inflation well outside the bank’s target band of 2-3% for the fifth consecutive year, raising questions about whether there is <a href="https://theconversation.com/vital-signs-the-rbas-marching-orders-are-no-longer-realistic-theyll-have-to-change-118693">any point to the band</a>.</p>
<hr>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/279442/original/file-20190613-32335-10rbga9.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/279442/original/file-20190613-32335-10rbga9.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/279442/original/file-20190613-32335-10rbga9.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=221&fit=crop&dpr=1 600w, https://images.theconversation.com/files/279442/original/file-20190613-32335-10rbga9.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=221&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/279442/original/file-20190613-32335-10rbga9.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=221&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/279442/original/file-20190613-32335-10rbga9.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=278&fit=crop&dpr=1 754w, https://images.theconversation.com/files/279442/original/file-20190613-32335-10rbga9.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=278&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/279442/original/file-20190613-32335-10rbga9.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=278&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">For years now, inflation has mostly been below the band.</span>
<span class="attribution"><a class="source" href="https://www.abs.gov.au/AUSSTATS/abs@.nsf/mf/6401.0">ABS 6401.0</a></span>
</figcaption>
</figure>
<hr>
<p>Mark Crosby, Warren Hogan and Adrian Blundell-Wignall suggest broadening the target band to 1-3%. Tony Makin and Nigel Stapledon suggest cutting it to 1-2%. </p>
<p>Richard Holden and Warwick McKibbin suggest ditching it altogether and replacing it with a target for nominal GDP growth. McKibbin suggests a nominal GDP target of 6%, which given the present forecast for weaker nominal GDP growth would mean interest rate cuts. In better times it would mean rate rises.</p>
<p>Chris Edmond and Craig Emerson defend the 2-3% inflation target saying that what is really concerning is the bank’s preparedness to stay beneath the target band for extended periods.</p>
<h2>Home prices</h2>
<p>The panel expects only modest falls in Sydney and Melbourne house prices of 2-3% in each city after falls of 10% over the past year. It is more optimistic on home building than is the Treasury, expecting housing investment to fall by 4.9% rather than the budget forecast of 7%.</p>
<hr>
<p><iframe id="kA0LV" class="tc-infographic-datawrapper" src="https://datawrapper.dwcdn.net/kA0LV/3/" height="400px" width="100%" style="border: none" frameborder="0"></iframe></p>
<hr>
<h2>Business</h2>
<p>None of the panellists expects household spending to grow by the 2.75% forecast in the budget. On average, the panel expects spending growth of just 1.9% in 2019-20, which is little better than the present 1.8% and only few points above population growth.</p>
<p>Janine Dixon blames continuing weak growth in wages and incomes. Nigel Stapledon says much of it flows from the weaker housing market. Household furnishings drive household spending growth. Household spending drives GDP growth, accounting for more than half of it.</p>
<p>In better news, the panel expects mining investment to rebound after sliding for most of the last five years. Its forecasts of growth in mining investment of 4.4%, and growth in non-mining investment of 4%, are in line with budget forecasts.</p>
<hr>
<p><iframe id="m2IDX" class="tc-infographic-datawrapper" src="https://datawrapper.dwcdn.net/m2IDX/5/" height="400px" width="100%" style="border: none" frameborder="0"></iframe></p>
<hr>
<h2>Interest rates and the budget</h2>
<p>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. </p>
<p>Only five panellists expect a followup cut in the first half of next year, but among them are Craig Emerson, Richard Holden and Steve Keen, who were the only three to <a href="https://theconversation.com/no-surplus-no-share-market-growth-no-lift-in-wage-growth-economic-survey-points-to-bleaker-times-post-election-110315">correctly</a>) forecast in January that there would be a rate cut at all this year.</p>
<p>Holden expects two further rate cuts in the second half of this year, taking the Reserve Bank cash rate to 0.75%, and then a further two in the first half of next year, taking it to just 0.25%. 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%.</p>
<p>Warwick McKibbin is the only panellist expecting the Reserve Bank to change course, expecting one further cut this year and then a series of increases as ballooning debt makes the Reserve Bank and other central banks realise they cut too far, pushing the cash rate back up to 1.5%.</p>
<hr>
<p><iframe id="rAkOt" class="tc-infographic-datawrapper" src="https://datawrapper.dwcdn.net/rAkOt/6/" height="400px" width="100%" style="border: none" frameborder="0"></iframe></p>
<hr>
<p>The panel expects a government 10-year borrowing rate of just 1.5%, which is about the lowest it has ever been. A year ago the 10-year bond rate was 2.7%. 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.</p>
<p>In further good news for the budget, the panel expects a substantially higher spot iron ore price than does the government, of US$95 a tonne by mid next year instead of the fall to US$55 assumed by the Treasury.</p>
<hr>
<p><iframe id="Nfyfm" class="tc-infographic-datawrapper" src="https://datawrapper.dwcdn.net/Nfyfm/3/" height="400px" width="100%" style="border: none" frameborder="0"></iframe></p>
<hr>
<p>The forecast is somewhat above the Department of Industry’s <a href="https://www.industry.gov.au/">new July forecast</a> of US$95 a tonne by the end of this year trending down to US$61 by the end of 2020, but are way in excess what was forecast in the budget. A <a href="https://budget.gov.au/2019-20/content/bp1/download/bp1_bs7.pdf">sensitivity analysis</a> included in the budget said that for every US$10 that the iron ore price was higher than budgeted, the government’s tax take would be A$1.1 billion higher in 2019-20 and A$3.7 billion higher in 2020-21.</p>
<p>The panel expects the Australian dollar to remain broadly where it is at just below 70 US cents as the upward push from strong commodity prices offsets the downward push from domestic economic weakness.</p>
<p>Yet despite the iron ore price and lower borrowing costs the panel expects a much weaker budget outcome than the A$7.1 billion surplus forecast in April.</p>
<p>Its average forecast is for a surplus of only $1.7 billion, which is a mere sliver of GDP (0.1%), practically indistinguishable from a deficit of the same amount.</p>
<hr>
<p><iframe id="nLBUU" class="tc-infographic-datawrapper" src="https://datawrapper.dwcdn.net/nLBUU/7/" height="400px" width="100%" style="border: none" frameborder="0"></iframe></p>
<hr>
<p>The forecasts come after <a href="https://www.finance.gov.au/publications/commonwealth-monthly-financial-statements/2019/mfs-may/">Finance Department figures</a> for May released on Friday raised the possibility of an early return to surplus in 2018-19. They suggest that surplus is at risk in 2019-20 and beyond, both because of economic weakness and an because of an increasingly urgent need to respond to that weakness through spending or further tax cuts.</p>
<p>Asked whether should the government strive to continue to deliver its promise of a surplus if economic growth remains weak or weakens further, former OECD director Adrian Blundell-Wignall replied bluntly, “of course not”.</p>
<p>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 Tony 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. </p>
<p>Former government minister Craig Emerson regretfully forecast that the government would deliver a surplus whatever the economic circumstances, for political reasons.</p>
<hr>
<h2>The Conversation 2019-20 Forecasting Panel</h2>
<p><em>Click on economist to see full profile. Forecasts as of June 24, 2019.</em></p>
<p><iframe id="tc-infographic-419" class="tc-infographic" height="400px" src="https://cdn.theconversation.com/infographics/419/ea784cbe61d74365c97efa62f6c5546ded73cd44/site/index.html" width="100%" style="border: none" frameborder="0"></iframe></p>
<p><a href="https://cdn.theconversation.com/static_files/files/841/2019_-2020_CONVERSATION_ECONOMIC_SURVEY.pdf?1579484023">PDF OF RESULTS</a></p><img src="https://counter.theconversation.com/content/119455/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Peter Martin does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The Conversation’s distinguished panel predicts unusually weak growth, dismal spending, no improvement in either unemployment or wage growth, and an increased chance of recession.Peter Martin, Visiting Fellow, Crawford School of Public Policy, Australian National UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1168872019-05-13T20:17:27Z2019-05-13T20:17:27ZThe next government can usher in our fourth decade recession-free, but it will be dicey<figure><img src="https://images.theconversation.com/files/274080/original/file-20190513-183106-1u006eg.jpg?ixlib=rb-1.1.0&rect=118%2C226%2C3048%2C1150&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">We can't rely on consumer spending to keep us recession-free.</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p>If we can avoid a recession for another two years, then on July 1, 2021 Australia will have recorded a record 30 years of economic expansion. We will be entering our fourth decade recession-free.</p>
<p>That’s the expectation embedded in the Reserve Bank’s latest set of forecasts in its <a href="https://www.rba.gov.au/publications/smp/2019/may/">Quarterly Statement on Monetary Policy</a>. But it will be a challenge. </p>
<p>A major downturn in housing markets, historically low interest rates and an international economy more complex and troublesome than we have seen for decades mean the new government will need to take bold and creative decisions in order for us to achieve this truly remarkable milestone. </p>
<h2>Things would be okay globally…</h2>
<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/274096/original/file-20190513-183080-1p0rgsy.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/274096/original/file-20190513-183080-1p0rgsy.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/274096/original/file-20190513-183080-1p0rgsy.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=865&fit=crop&dpr=1 600w, https://images.theconversation.com/files/274096/original/file-20190513-183080-1p0rgsy.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=865&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/274096/original/file-20190513-183080-1p0rgsy.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=865&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/274096/original/file-20190513-183080-1p0rgsy.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=1087&fit=crop&dpr=1 754w, https://images.theconversation.com/files/274096/original/file-20190513-183080-1p0rgsy.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=1087&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/274096/original/file-20190513-183080-1p0rgsy.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=1087&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
<span class="attribution"><a class="source" href="https://www.rba.gov.au/publications/smp/2019/may/">Reserve Bank Statement on Monetary Policy May 2019</a></span>
</figcaption>
</figure>
<p>The bank has painted a benign picture of the global economic outlook for the next few years after recent data have allayed concerns about a US recession.</p>
<p>The Chinese authorities appear to have stabilised growth in the world’s second largest economy after fears of a steeper decline in activity emerged late last year. Although the Chinese economy faces many challenges, there doesn’t appear to be any signs of an imminent problem. </p>
<p>That should leave economic growth in Australia’s major trading partners at a respectable rate of 3.75% over the next few years, not too different to the global economy. While not exactly a boom, it should be enough to support the Australian economy through to 2021.</p>
<p>This is reflected in the bank’s expectations for the key sectors linking Australia to the world economy. Resource exports are expected to experience strong growth, as are education exports and tourism. </p>
<p>The bank is even expecting manufacturing exports to grow, due to healthy global economic growth and a low Australian dollar. The same can’t be said for rural exports, with drought conditions expected to hurt our international sales for some time.</p>
<h2>…were it not for the threat of a trade war</h2>
<p>This otherwise upbeat assessment of global economic prospects could come to naught if the renewed trade dispute between the US and China intensifies. Te bank identifies this as a major risk to Australia’s economic outlook.</p>
<p>Even though Australia could benefit from the dispute via Chinese domestic economic stimulus in response to difficulties in moving exports, a continuation of rising protectionist measures would impact us directly and indirectly as global economic growth slowed.</p>
<p>Managing the China relationship in the midst of Trump’s trade war will be critical for the incoming government. A misstep could see China use non-tariff measures to slow Australia’s exports.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/stakes-are-high-as-us-ups-the-ante-on-trade-dispute-with-china-116985">Stakes are high as US ups the ante on trade dispute with China</a>
</strong>
</em>
</p>
<hr>
<p>It would also make life difficult for Australian companies attempting to capitalise on the opportunities offered by China’s emerging middle class.</p>
<h2>In Australia, households are battening down</h2>
<p>The Reserve Bank expects employment to continue to grow by enough to keep the unemployment rate stable. However, there seems to be little prospect of a rapid pick up in either wages or inflation that will make a dent in Australia’s household debt burdens.</p>
<p>The bank has made it clear that the very low inflation environment will be with us for several years to come. It expects the inflation pulse of the economy, which appears to have slipped to around 1.5% in the past six months, to only slowly pick up, climbing towards 2% by 2020 and just above 2% (and back into the Reserve Bank’s target zone) in 2021.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/no-surplus-no-share-market-growth-no-lift-in-wage-growth-economic-survey-points-to-bleaker-times-post-election-110315">No surplus, no share market growth, no lift in wage growth. Economic survey points to bleaker times post-election</a>
</strong>
</em>
</p>
<hr>
<p>That gradual increase is unlikely to be meaningfully outstripped by wages growth, implying either a very small lift in living standards or no increase in living standards. It will result in very low consumption growth.</p>
<p>The bank is forecasting historically weak consumption growth of about 2.5% for the next few years. It will put the high-employing retail sector under pressure.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/274095/original/file-20190513-183077-5xz4du.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/274095/original/file-20190513-183077-5xz4du.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/274095/original/file-20190513-183077-5xz4du.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=263&fit=crop&dpr=1 600w, https://images.theconversation.com/files/274095/original/file-20190513-183077-5xz4du.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=263&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/274095/original/file-20190513-183077-5xz4du.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=263&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/274095/original/file-20190513-183077-5xz4du.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=330&fit=crop&dpr=1 754w, https://images.theconversation.com/files/274095/original/file-20190513-183077-5xz4du.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=330&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/274095/original/file-20190513-183077-5xz4du.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=330&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
<span class="attribution"><a class="source" href="https://www.rba.gov.au/publications/smp/2019/may/">Reserve Bank Statement on Monetary Policy forecasts, May 2019</a></span>
</figcaption>
</figure>
<h2>Two more rate cuts…</h2>
<p>The only good news for households (those with debt at least) is that there is interest rate relief in prospect. The bank uses market pricing for the interest rate assumptions in its forecasts. Markets are pricing a cash rate of 1% over the year ahead, down from the present record-low 1.5%. The bank suggests it will come in twocuts of 25 points.</p>
<p>Even with 50 points of cuts factored in, the bank believes it will only just meet its targets of falling unemployment and 2% inflation. It might have to cut further.</p>
<p>But the effectiveness of interest rate cuts as a way of bolstering the economy is in serious question. </p>
<p>The costs of sustained easy money are rising.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/vital-signs-zero-inflation-means-the-reserve-bank-should-cut-rates-as-soon-as-it-can-on-tuesday-week-115931">Vital signs. Zero inflation means the Reserve Bank should cut rates as soon as it can, on Tuesday week</a>
</strong>
</em>
</p>
<hr>
<p>Not only is wealth inequality a potential problem, but as interest rates get lower the banks find cuts harder to pass cuts on.</p>
<h2>…but they mightn’t be enough</h2>
<p>A major issue for the new government will be to recognise the new-found importance of fiscal policy (spending and tax policy) to support economic growth. It will need to be used in an even handed way, without a hint of pork barrelling. Otherwise it will be wasted.</p>
<p>While lower interest rates will good news for the large proportion of Australians that have mortgages, they will not be great for savers. Whether it is someone saving for a home deposit or someone living off retirement savings, super low interest rates will not make life easier.</p>
<p>This challenging environment for Australian households will have implications beyond just the economy’s performance, making <a href="https://theconversation.com/australias-populist-moment-has-arrived-111491">for tricky political waters</a>. Populist political propositions will have much more resonance in difficult times, particularly in regional and rural areas with high retiree populations and the exposure to drought.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/why-the-reserve-bank-shouldnt-but-might-cut-interest-rates-on-tuesday-116354">Why the Reserve Bank shouldn't (but might) cut interest rates on Tuesday</a>
</strong>
</em>
</p>
<hr>
<p>The next Australian government should not be complacent. </p>
<p>It will need to adopt an explicit strategy needs to deal with the economic and political fallout from the adjustments within the household sector. it will need to address falling wealth and low real income growth through serious structural reforms aimed at driving up productivity and real wages.</p>
<p>In the short term the government is going to need to be ready to deploy its substantial resources to support households should conditions deteriorate. The <a href="https://theconversation.com/your-income-tax-questions-answered-in-three-easy-charts-labor-and-coalition-proposals-side-by-side-115450">low and middle income tax offset</a> are a good starting point. </p>
<h2>Business is in good shape so far…</h2>
<p>Although business confidence has dropped over the past nine months, the Reserve Bank expects businesses to continue to invest and hire new staff. It expects non-mining business investment to expand at a healthy rate. But this can’t be taken for granted given the precarious nature of consumer demand. </p>
<p>The next government will have to be acutely sensitive to the risk of undermining business confidence. A hiring strike by business would be dangerous for an economy tiptoeing along a knife edge.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/trick-question-whos-the-better-economic-manager-116968">Trick question: who's the better economic manager?</a>
</strong>
</em>
</p>
<hr>
<p>We might be surprised by good news. In other advanced economies an unexpected bonus has been strong employment growth despite economic and political uncertainty and modest economic growth.</p>
<p>While this international experience shouldn’t give us confidence that stronger employment growth translate into stronger wage growth, it might at least help maintain consumer spending in the face of lower house prices.</p>
<h2>…except for construction</h2>
<p>The Reserve Bank is explicit in its expectation that housing construction will turn down over the next two years. The drop off in activity could be big and have a major negative impact on employment. Although there is currently a high level of activity in commercial construction, particularly infrastructure-related activity, it is unlikely to be big enough to offset the downturn in housing construction.</p>
<p>Governments across Australia have an opportunity to think about nation building. Funding costs are low, government finances are strong and the shrinking construction sector will free up labour and other resources for important projects.</p>
<h2>Which means its time for nation building</h2>
<p>The next term of government will see very little economic momentum originating from consumers. They are in balance sheet repair mode. That makes it the perfect time for the governments to lead the way and drive private sector economic activity through a whole range of long-term investments in Australia’s future.</p>
<p>Coordinating this with the states and identifying the right projects will be the most important challenge facing the new government.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/australias-populist-moment-has-arrived-111491">Australia’s populist moment has arrived</a>
</strong>
</em>
</p>
<hr>
<img src="https://counter.theconversation.com/content/116887/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Warren Hogan does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Expect two more interest rate cuts, but they mightn’t be enough.Warren Hogan, Industry Professor, University of Technology SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1079132018-11-29T14:58:47Z2018-11-29T14:58:47ZThe economic cost of Brexit is unavoidable – but that doesn’t mean it’s not worth it<figure><img src="https://images.theconversation.com/files/248002/original/file-20181129-170229-dyo4su.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/pebblestone-rainy-london-umbrella-colors-english-795963658?src=HuEtjUBo8Pw6eZp75WEojw-1-8">By Markus Schmidt-Karaca / Shutterstock</a></span></figcaption></figure><p>Economic perceptions matter. Polling expert <a href="http://ukandeu.ac.uk/wp-content/uploads/2018/09/Do-Voters-Still-Want-to-Leave-the-EU.pdf">John Curtice has shown</a> that expectations of economic impact shape preferences around Brexit. As many as 96% of Remain voters think the UK will be worse off after Brexit, and would consequently vote Remain if given another chance. For Leave voters, 94% think the UK will be better off and would vote to leave again. So knowing what might happen matters.</p>
<p>According to the government’s <a href="https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/759762/28_November_EU_Exit_-_Long-term_economic_analysis.pdf">latest analysis</a>, Brexit will mean UK growth is slower than if it hadn’t voted to leave. The Treasury report did not forecast the impact of the Brexit deal that’s on the table, but the modelling suggests it would reduce UK GDP by 2-4% in the next 15 years. If there is a no-deal Brexit, the UK economy could shrink by 9.3%.</p>
<p>We at The UK in a Changing Europe, working with the Centre for Economic Performance at the LSE and the Institute for Fiscal Studies, have reached <a href="http://ukandeu.ac.uk/wp-content/uploads/2018/11/The-economic-consequences-of-Brexit.pdf">similar findings</a>, modelling specifically for how the prime minister’s Brexit deal would affect the UK economy.</p>
<p>We estimate that Theresa May’s deal could reduce UK GDP per capita by between 1.9% and 5.5% over ten years, compared to the “baseline” scenario of remaining in the EU. The cost to the public finances would be between 0.4% and 1.8% of GDP over the same period, and the corresponding figures for a no-deal Brexit would be 1% to 3.1%.</p>
<p>This is difficult to put in perspective, but a 0.4% hit to the public finances implies about £9 billion less in tax receipts by 2030 and a 3.1% fall suggests something of the magnitude of £64 billion. And this accounts for the repatriation of UK contributions to the EU budget and ignores any short-term disruption that might arise when the UK first moves to new trading terms.</p>
<p>Let’s try to put this into comparative context. The IFS <a href="https://www.ifs.org.uk/publications/13302">estimates</a> that the financial crisis cost the UK economy £300 billion in the decade since 2008. Our modelling implies lost output of between £40 billion and £110 billion by 2030. Brexit would therefore be substantially less damaging than the financial crisis. This being said, however, it comes on top of a decade of lost growth at a time when the country is less well placed to cope.</p>
<h2>An informed estimate</h2>
<p>We should stress of course that our results are subject to a high degree of uncertainty. This is partly a result of difficulties inherent to economic modelling. It is also partly down to the vague and aspirational language in the <a href="https://theconversation.com/brexit-political-declaration-what-it-means-for-the-future-uk-eu-relationship-107256">political declaration</a> on the future relationship between the EU and UK. We’ve had to make some fairly big assumptions about what this might mean in practice. Specifically, there is insufficient detail in the <a href="https://theconversation.com/brexit-draft-withdrawal-agreement-experts-react-107027">withdrawal agreement</a> to know exactly how the customs backstop would operate or the extent of future regulatory divergence between the UK and the EU.</p>
<p>All this being said, these findings represent our best judgement about the impact of the deal. That does not mean they will be correct – indeed, they almost certainly will be inaccurate to some extent. But they do provide an informed estimate of what might happen.</p>
<p>Ultimately, there are some basic facts that need to be acknowledged if we’re to have a sensible public debate about what Brexit will mean. It is not possible to have frictionless trade with the EU without also having the legal obligations that enforce such lack of friction. If it were, there would frankly be little value to being in the EU in the first place.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/247999/original/file-20181129-170250-akz531.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/247999/original/file-20181129-170250-akz531.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=401&fit=crop&dpr=1 600w, https://images.theconversation.com/files/247999/original/file-20181129-170250-akz531.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=401&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/247999/original/file-20181129-170250-akz531.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=401&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/247999/original/file-20181129-170250-akz531.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=504&fit=crop&dpr=1 754w, https://images.theconversation.com/files/247999/original/file-20181129-170250-akz531.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=504&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/247999/original/file-20181129-170250-akz531.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=504&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Trade effects of Brexit.</span>
<span class="attribution"><a class="source" href="http://ukandeu.ac.uk/wp-content/uploads/2018/11/The-economic-consequences-of-Brexit.pdf">UK in a changing Europe</a></span>
</figcaption>
</figure>
<p>Nor is it possible to maintain the economic benefits of such frictionless trade with our nearest and largest trading partner from the outside. Furthermore, as our modelling of a substantial reduction of immigration in the research also shows, we cannot severely limit immigration without bearing an economic cost for it. Politicians are well within their rights to make a policy choice to reduce immigration, but they ought to acknowledge the cost of doing so.</p>
<p>None of this is to say, of course, that there aren’t legitimate counter arguments. Economics isn’t everything. Moreover, there are those who would argue that aggregate measures of the state of the national economy have little bearing on their own lives and livelihoods. It might also be the case that the economic impacts will be slow to materialise, so voters might not directly notice any changes, and any they do notice might not necessarily be attributed to Brexit. In other words, the economics could ultimately turn out to be irrelevant to the politics.</p>
<p>It is fine to argue that Brexit is worth the economic damage it implies, that economics is not the most important consideration, or that economic warnings are overblown. What is not acceptable is to deny that there will be any damage at all.</p><img src="https://counter.theconversation.com/content/107913/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Anand Menon receives funding from the ESRC.</span></em></p><p class="fine-print"><em><span>Matthew Bevington receives funding from the ESRC.</span></em></p>Independent research estimates that Theresa May’s deal could reduce UK GDP per capita by between 1.9% and 5.5% over ten years.Anand Menon, Professor of European Politics and Foreign Affairs, King's College LondonMatthew Bevington, Researcher, UK in a Changing Europe, King's College LondonLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/892852017-12-17T19:21:51Z2017-12-17T19:21:51ZMorrison will deliver better news on debt in budget update<p>The 2017 budget update will show an improvement in the outlook for debt compared with projections in May, resulting in significant savings for taxpayers in interest payments in coming years.</p>
<p>Net debt is now expected to peak in 2018-19 at 19.2% of GDP. This is a 0.6 percentage point fall on the 19.8% estimated in the budget. In dollar terms it is A$11.9 billion less than the May estimate of A$375 billion.</p>
<p>Net debt at the end of the forward estimates is projected to be A$355.3 billion, compared with the earlier projection of A$366.2 billion.</p>
<p>By the end of the forward estimates gross debt is now projected to be A$23 billion less than estimated in the budget – a reduction from the earlier projected A$606 billion to A$583 billion.</p>
<p>This is 1% of GDP lower than projected in May.</p>
<p>The revisions mean taxpayers will save A$2.3 billion over the forward estimates in interest payments on the debt, with savings growing to a A$1 billion save in 2020-21.</p>
<p>By the end of a decade, gross debt is estimated to be about A$40 billion less than projected at budget time.</p>
<p>From the present financial year, the government will no longer be borrowing to pay for recurrent spending. This is a year earlier than forecast in the budget. It will be the first time since the global financial crisis that the federal government is not expected to need to borrow for recurrent spending.</p>
<p>Treasurer Scott Morrison said Monday’s update would show the government was “staying the course to keep expenditure under control and return the budget back to balance”. </p>
<p>He said the government’s “responsible budget management means we are now in a position to no longer be borrowing to pay for everyday recurrent expenditure like schools funding, Medicare and welfare, a year earlier than forecast”.</p>
<p>“We are no longer putting the equivalent of the national grocery bill on the credit card,” Morrison said.</p><img src="https://counter.theconversation.com/content/89285/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Michelle Grattan does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The 2017 budget update will show an improvement in the outlook for debt compared with projections in May.Michelle Grattan, Professorial Fellow, University of CanberraLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/772372017-05-05T04:51:55Z2017-05-05T04:51:55ZLeave budget forecasting to Treasury: economists<p>A majority of economists in this month’s <a href="https://business.monash.edu/economics-forum/polls">ESA Monash poll</a> said the economic forecasts used in the federal budget should still be prepared by Treasury, despite difficulty in recent years.</p>
<p>The poll asked whether the the economic forecasts – in particular, the forecast of nominal GDP growth – should be outsourced to an independent body, such as the <a href="http://www.aph.gov.au/About_Parliament/Parliamentary_Departments/Parliamentary_Budget_Office">Parliamentary Budget Office</a>.</p>
<iframe src="https://datawrapper.dwcdn.net/9hnl5/1/" scrolling="no" frameborder="0" allowtransparency="true" allowfullscreen="allowfullscreen" webkitallowfullscreen="webkitallowfullscreen" mozallowfullscreen="mozallowfullscreen" oallowfullscreen="oallowfullscreen" msallowfullscreen="msallowfullscreen" width="100%" height="350"></iframe>
<p>In 2010, the UK Government gave the task of preparing economic forecasts to a newly-created <a href="http://budgetresponsibility.org.uk/">Office for Budget Responsibility</a>. The <a href="http://www.chrisbowen.net/media-centre/media-releases.do?newsId=6885">Australian Labor Party proposed doing the same</a> ahead of the last federal election. </p>
<p><a href="http://www.imf.org/external/np/fad/council/">According to the IMF</a>, 39 countries now have what it calls “fiscal councils”. These are:</p>
<blockquote>
<p>independent public institutions aimed at strengthening commitments to sustainable public finances through various functions, including public assessments of fiscal plans and performance, and the evaluation or provision of macroeconomic and budgetary forecasts.</p>
</blockquote>
<p>Since the early 2000s, Treasury <a href="https://theconversation.com/why-biased-budget-forecasts-make-poor-politics-76945">has had difficulty</a> making accurate forecasts of some of the key economic parameters underpinning the annual federal budget. In particular, Treasury’s forecasts of growth in nominal GDP – a key driver of revenue projections – have frequently been wide of the mark. </p>
<p>This largely reflects the difficulties Treasury has had in forecasting movements in Australia’s terms of trade, and hence in forecasting changes in the GDP deflator - a measure of the level of prices of all new, domestically produced, final goods and services in an economy. This is as opposed to errors in forecasts of real GDP growth.</p>
<p>Typically, Treasury has been insufficiently optimistic when the terms of trade have been rising (as they were between 2003-04 and 2008-09, and again in 2010-11), and too optimistic when the terms of trade have been falling (as they were between 2012-13 and 2015-16).</p>
<p>As a result, forward estimates of the budget’s “bottom line” – the “underlying cash balance” – have routinely been off.</p>
<p>Arguably, that was a nice problem to have when budget surpluses turned out to be larger than forecast. But it has been a source of much embarrassment in recent years. Both for Treasury and for politicians <a href="http://www.abc.net.au/news/2012-12-20/swan-dumps-surplus-pledge/4438508">who promised an imminent return to surplus</a>.</p>
<p>Treasury’s experience has been by no means unique. Indeed, an independent review of Treasury’s forecasting performance <a href="https://www.treasury.gov.au/%7E/media/Treasury/Publications%20and%20Media/Publications/2013/forecasting_review/downloads/PDF/forecasting-review.ashx">concluded</a> that Treasury’s performance was “comparable with that of other domestic forecasters” and “comparable with, or better than, [that] of official agencies overseas”.</p>
<p>There have also been suggestions that the economic forecasts used in budgets have been the subject of political interference, although these have been vigorously refuted by Treasury heads.</p>
<h2>The results</h2>
<p>35 of our panellists responded to this month’s poll. Of these, 13 (37%) agreed with the proposition that the economic forecasts underpinning the budget should be outsourced, 20 (57%) disagreed, and two were uncertain. </p>
<p>Six of those who agreed with the proposition did so strongly. Only four of those who disagreed felt strongly about their opinion. </p>
<p>After weighting our panellists’ votes according to the confidence which they attached to their opinions, a majority were against the idea.</p>
<p>Respondents who agreed with the idea of outsourcing the budget’s economic forecasts typically did so not because they thought that an outside organisation would necessarily produce “more accurate” forecasts. Rather, in their view, an outside organisation was less likely to be vulnerable to (or perceived as being vulnerable to) political interference.</p>
<p>Most of those who disagreed with the proposition recognised that there was room for improvement in Treasury’s forecasting performance. But they were typically of the view that there was no reason to believe that an independent agency would do any better than Treasury had. </p>
<p>A couple of respondents argued that it was consistent with democratic principles for the elected government to take the responsibility for all of the projections and forecasts in the budget, including those of economic parameters.</p>
<p><iframe id="tc-infographic-27" class="tc-infographic" height="400px" src="https://cdn.theconversation.com/infographics/27/3db0e3b1bc80c8de1d6acb0e492ec6f2afc0111c/site/index.html" width="100%" style="border: none" frameborder="0"></iframe></p>
<hr>
<p><em>The <a href="https://business.monash.edu/economics-forum">ESA Monash Forum</a> is a joint initiative between Monash Business School and the Economic Society of Australia. Saul Eslake was a guest writer for the Forum.</em></p><img src="https://counter.theconversation.com/content/77237/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Saul Eslake does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Polled economists say another independent body wouldn’t necessairly do a better job of economic forecasting for the budget than Treasury.Saul Eslake, Vice-Chancellor’s Fellow, University of TasmaniaLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/769452017-05-03T20:07:43Z2017-05-03T20:07:43ZWhy biased budget forecasts make poor politics<p>For the last eight years, budget outcomes have consistently been much lower than previous budget forecasts. But in each year, the treasurer has again forecast a happy return to balance over the next four years. Over-optimistic forecasts have made it easy for treasurers to avoid making the really tough decisions on budget repair.</p>
<p>Budget outcomes have continued to surprise because of systematic revenue forecast errors by Treasury, which dwarf actual policy changes in explaining changes to the budget bottom line. These are compounded by the wilful blindness of politicians, happy to use these forecasts to justify avoiding difficult decisions. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/167623/original/file-20170503-4102-1y5afna.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/167623/original/file-20170503-4102-1y5afna.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/167623/original/file-20170503-4102-1y5afna.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=415&fit=crop&dpr=1 600w, https://images.theconversation.com/files/167623/original/file-20170503-4102-1y5afna.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=415&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/167623/original/file-20170503-4102-1y5afna.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=415&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/167623/original/file-20170503-4102-1y5afna.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=522&fit=crop&dpr=1 754w, https://images.theconversation.com/files/167623/original/file-20170503-4102-1y5afna.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=522&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/167623/original/file-20170503-4102-1y5afna.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=522&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
<span class="attribution"><span class="source">Grattan Institute</span>, <span class="license">Author provided</span></span>
</figcaption>
</figure>
<h2>How the budget estimates were wrong about economic outcomes</h2>
<p>Nominal GDP is the most important economic driver of budget outcomes. But nominal GDP outcomes have differed from forecasts by an average of almost 1.5% of GDP, over the past two decades. </p>
<p>An <a href="http://www.treasury.gov.au/PublicationsAndMedia/Publications/2013/Forecasting-review">external review of Treasury forecasts</a> conducted in 2012 found that over a 20-year period, the GDP estimates were unbiased. But this glosses over bias at different points of the cycle. The projections systematically underestimated nominal GDP in the boom years, and overestimated it when mining prices fell. </p>
<p>This flies in the face of predictions from economists such as the <a href="http://www.imf.org/external/pubs/ft/weo/2015/01/pdf/text.pdf">International Monetary Fund</a>, and the <a href="http://www.frbsf.org/economic-research/files/wp2016-08.pdf">US Federal Reserve</a> who suggest that long-run economic growth in developed countries trended lower even before the global financial crisis, and that future expectations should be lower again.</p>
<p>This debate is not just for policy wonks. Nominal GDP growth influences nominal wages growth. If wages just grow at the rate of the last 12 months, rather than at the higher growth rates forecast for the next four years, income tax collections will be A$7 billion less than the budget estimate for 2019-20.</p>
<p>This mismatch between actual growth and forecast growth is a result of the built-in optimism generator in Treasury’s budget estimates methodology. This assumes that a period of below-trend growth will always be followed by a period of above-trend growth, and so projects much higher growth in nominal GDP and wages in 2018-19 and 2019-20. </p>
<p>If Treasury’s forecast of wage growth of 12% over the next four years were unbiased, then a plausible downside to this forecast would be as likely as the equivalent upside. If wages stay at their current levels - a very plausible scenario - cumulative growth would be 9% (3% lower than Treasury’s forecast). The corresponding upside (3% higher than Treasury’s forecast) would be nominal wages growth of 15% over the next four years - which few would think remotely plausible. </p>
<h2>How the budget estimates were wrong about tax revenue</h2>
<p>Problems with estimating nominal wage growth explain why the reality of income tax collections has been disappointing. There have been different problems in estimating company, capital gains, and superannuation taxes. </p>
<p>Treasury continues to assume very rapid increases in the revenue from these taxes. Over four years, company and superannuation taxes are projected to increase by half. Capital gains tax collections are projected to almost double in four years.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/167625/original/file-20170503-4104-1woihox.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/167625/original/file-20170503-4104-1woihox.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/167625/original/file-20170503-4104-1woihox.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=415&fit=crop&dpr=1 600w, https://images.theconversation.com/files/167625/original/file-20170503-4104-1woihox.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=415&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/167625/original/file-20170503-4104-1woihox.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=415&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/167625/original/file-20170503-4104-1woihox.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=522&fit=crop&dpr=1 754w, https://images.theconversation.com/files/167625/original/file-20170503-4104-1woihox.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=522&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/167625/original/file-20170503-4104-1woihox.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=522&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
<span class="attribution"><span class="source">Grattan Insitute</span>, <span class="license">Author provided</span></span>
</figcaption>
</figure>
<p>Forecasting a big lift in company tax revenues may be warranted. The tax is collected in instalments based on the previous year’s profits, with catch-up payments or rebates for the following year based on actual profits. </p>
<p>As a result, revenues should jump during an economic upswing, as there are simultaneously both higher instalments and catch-up payments from the previous year. Tax revenues should increase further once companies have used up all the tax losses they incurred during the global financial crisis by offsetting them against subsequent profits. </p>
<p>But it’s harder to defend the capital gains tax (CGT) forecasts. Treasury believes that CGT revenue over the last few years has been suppressed, as gains were offset by capital losses incurred during the global financial crisis. </p>
<p>Its estimates assume that these tax losses have mostly been used up as offsets against gains in previous years, and CGT revenues will now increase rapidly. Similar assumptions have proved wrong for several years in a row. Maybe 2017-18 will be different.</p>
<p>But there may be another explanation for low CGT revenues, which implies they may stay low for longer. Much of the capital gains tax collected in the past was from earnings on superannuation funds. </p>
<p>These superannuation funds are now under more pressure to report after-tax, as well as pre-tax returns. And so, many now work harder to avoid crystallising CGT liabilities. In particular, super funds shuffle assets between exiting members and members who are contributing new funds. </p>
<p>If this is the reason for lower superannuation and capital gains tax revenues, they are unlikely to return to pre-global financial crisis levels, as the budget estimates assume. </p>
<h2>Why bad forecasting promotes bad politics</h2>
<p>Unbiased projections matter because of the way estimates play into political debate. When the budget is projected to float back to near surplus over the following four years, then it seems less urgent to make politically difficult decisions to repair the budget. </p>
<p>Successive governments have engaged in forecast-led denial of the need for more active budget repair. </p>
<p>For example, Wayne Swan’s rhetoric for the 2011-12 budget claimed:</p>
<blockquote>
<p>We are on track for surplus in 2012‑13, on time, as promised — and this provides the solid foundations for the targeted investments we announce tonight.</p>
</blockquote>
<p>Similarly, Scott Morrison’s take in late 2016 was that:</p>
<blockquote>
<p>This budget keeps us on a sustainable path to bring the budget back to balance.</p>
</blockquote>
<p>Although focusing on the bottom line number is psychologically and politically inevitable, Treasury does warn governments about uncertainty in the numbers. The revenue forecasts come with a particularly large error margin. </p>
<p>Looking out four years, Treasury is 90% confident that government revenues will fall within 17.5 and 23.5% of GDP. This range is so large that if receipts were at the upper end, there would be a healthy surplus, and at the lower end, the current deficit would almost double. </p>
<p>Within this range, politicians are hitching their wagon for budget repair to forecasts where the upside and downside risks are not obviously symmetrical. In practice, this budget strategy has for eight years shifted the costs and risks of budget repair onto future generations. </p>
<p>To hit a four-year target, budget estimates should instead have a pessimistic bias. If there are happy surprises, it’s politically easy to loosen the budget purse strings. By contrast, when reality disappoints, then it is politically hard to make up lost ground by either increasing taxes or reducing expenditure.</p>
<p>So it’s time for a new approach that adopts more conservative forecasts, and makes a genuine commitment to budget repair. How about it, Mr Morrison?</p><img src="https://counter.theconversation.com/content/76945/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Grattan Institute began with contributions to its endowment of $15 million from each of the Federal and Victorian Governments, $4 million from BHP Billiton, and $1 million from NAB. In order to safeguard its independence, Grattan Institute’s board controls this endowment. The funds are invested and contribute to funding Grattan Institute's activities. Grattan Institute also receives funding from corporates, foundations, and individuals to support its general activities as disclosed on its website.</span></em></p><p class="fine-print"><em><span>Danielle Wood does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Wonky forecasts show it’s time for a new approach that adopts more conservative forecasts, and makes a genuine commitment to budget repair.John Daley, Chief Executive Officer, Grattan InstituteDanielle Wood, Fellow, Australian Perspectives, Grattan InstituteLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/757772017-04-20T02:46:53Z2017-04-20T02:46:53ZBudget explainer: if you want to know about the economy, look past the budget forecasts<p>When the federal government releases its annual budget it provides an economic outlook that includes forecasts and key indicators of the state of the economy. But we should be critical of some of these numbers. Many either don’t tell the entire story or provide more of an indication of where we have been rather than where we are heading.</p>
<p>The unemployment rate is a <a href="http://www.budget.gov.au/2016-17/content/bp1/download/bp1.pdf">key figure in the federal budget</a>, but it doesn’t capture the full extent of slack in the labour force. The rate of growth of Gross domestic product (GDP) is <a href="http://www.budget.gov.au/2016-17/content/bp1/download/bp1.pdf">another important figure</a>, but it also doesn’t really say much about the state of the economy.</p>
<p>Here are some things behind these broad indicators that you would need to get a fuller picture of the economy.</p>
<h2>The labour force</h2>
<p>According to the Australian Bureau of Statistics, the unemployment rate is currently <a href="http://www.rba.gov.au/publications/smp/2017/feb/pdf/06-economic-outlook.pdf">5.9%</a>. This <a href="http://www.abs.gov.au/AUSSTATS/abs@.nsf/0/FBE517ECA9B07F63CA257D0E001AC7D4?OpenDocument">means</a> that 5.9% of people in the labour force did not work for more than one hour in the week the survey was conducted. </p>
<p>The labour force consists of those older than 15 who actively looked for work in the four weeks prior to the survey, were available to work during the survey week, or were waiting to start a new job and could have worked sooner if the job had been available.</p>
<p>The last budget <a href="http://www.budget.gov.au/2016-17/content/bp1/download/bp1.pdf">forecast</a> that the unemployment rate would remain steady over the next four years.</p>
<iframe src="https://datawrapper.dwcdn.net/QKgJW/5/" frameborder="0" allowtransparency="true" allowfullscreen="allowfullscreen" webkitallowfullscreen="webkitallowfullscreen" mozallowfullscreen="mozallowfullscreen" oallowfullscreen="oallowfullscreen" msallowfullscreen="msallowfullscreen" width="100%" height="400"></iframe>
<p>There is a problem with this very tight definition of unemployment. It excludes part-time workers who would like more hours of work. This group are called <a href="http://www.rba.gov.au/publications/smp/2017/feb/pdf/box-b-underemployment-and-labour-market-spare-capacity.pdf">underemployed</a> workers. The underemployment rate is currently <a href="http://www.abs.gov.au/AUSSTATS/abs@.nsf/DetailsPage/6202.0Feb%202017?OpenDocument">8.8%</a> of the labour force. Underemployment isn’t an indicator highlighted in the budget documents. </p>
<p>Altogether, 14.7% (the 5.9% unemployed plus the 8.8% underemployed) of the labour force is underutilised. This is arguably a more accurate picture of the labour market than the unemployment rate. </p>
<p>What makes this distinction even more important is that the trends are diverging. Since 2014 the underemployment rate has been trending up while the unemployment rate has been trending down. This difference is in part explained by the <a href="http://www.rba.gov.au/publications/smp/2017/feb/pdf/box-b-underemployment-and-labour-market-spare-capacity.pdf">rise in the share of part-time workers</a> working fewer hours than they would have liked, which pushes unemployment down but underemployment up.</p>
<iframe src="https://datawrapper.dwcdn.net/YDqUo/2/" frameborder="0" allowtransparency="true" allowfullscreen="allowfullscreen" webkitallowfullscreen="webkitallowfullscreen" mozallowfullscreen="mozallowfullscreen" oallowfullscreen="oallowfullscreen" msallowfullscreen="msallowfullscreen" width="100%" height="400"></iframe>
<p>On top of this, the unemployment rate tells us where the economy has been more accurately than where it is going – it is a lagging indicator. In Australia, changes in employment growth lag changes in output of goods and services <a href="http://www.abs.gov.au/ausstats/abs@.nsf/featurearticlesbytitle/09CA2BE34A12A670CA2570EE00193A49?OpenDocument">by six to nine months</a>. </p>
<p>So by itself at least, the unemployment rate also doesn’t tell us much about the state of the labour market or where it is heading.</p>
<h2>Economic growth</h2>
<p>Australia is <a href="http://www.rba.gov.au/publications/smp/2017/feb/pdf/06-economic-outlook.pdf">currently growing at 2%</a> per annum and this is forecast to increase to 3% by the end of this year. </p>
<p>But as with the unemployment rate, there are <a href="https://theconversation.com/how-and-why-we-are-moving-beyond-gdp-as-a-measure-of-human-progress-68672">shortcoming in GDP growth as a measure of economic progress</a> and the importance of growth to our national living standards is overplayed. The prices of our commodity exports have a bigger impact on fluctuations in our living standards than growth in GDP.</p>
<iframe src="https://datawrapper.dwcdn.net/geFSM/3/" frameborder="0" allowtransparency="true" allowfullscreen="allowfullscreen" webkitallowfullscreen="webkitallowfullscreen" mozallowfullscreen="mozallowfullscreen" oallowfullscreen="oallowfullscreen" msallowfullscreen="msallowfullscreen" width="100%" height="400"></iframe>
<p>The prices of our commodity exports <a href="http://www.rba.gov.au/publications/smp/2017/feb/pdf/06-economic-outlook.pdf">doubled</a> during the mining boom from early 2000’s to 2010, driving up the nation’s income, boosting the stock market and government’s revenue. Commodity prices have since <a href="http://www.rba.gov.au/statistics/frequency/commodity-prices/2017/icp-0317.html">fallen substantially</a>. These fluctuations swamp any effect of changes in growth on our living standards – and the fluctuations are entirely out of our hands.</p>
<p>We need to look behind the growth number at the drivers of GDP to get a better picture of the state of the economy, as well as where it is headed.</p>
<iframe src="https://datawrapper.dwcdn.net/ensUn/1/" frameborder="0" allowtransparency="true" allowfullscreen="allowfullscreen" webkitallowfullscreen="webkitallowfullscreen" mozallowfullscreen="mozallowfullscreen" oallowfullscreen="oallowfullscreen" msallowfullscreen="msallowfullscreen" width="100%" height="400"></iframe>
<p>Consumption activity is one such driver and has a range of indicators. One of them is retail turnover, which <a href="http://www.abs.gov.au/ausstats/abs@.nsf/mf/8501.0">has recently been flat</a> in real terms (adjusted for inflation). Retail turnover is another measure not found in the budget documents, but shows revenue from a survey of large and small businesses and gives an idea of the demand in the economy. </p>
<p>Another good indicator is sales of new motor vehicles, <a href="http://www.abs.gov.au/ausstats/abs@.nsf/mf/9314.0">which have also been flat</a> recently. </p>
<p><a href="https://theconversation.com/why-and-how-do-we-measure-what-consumers-feel-68804">Consumer confidence</a> is also a good indicator of consumption. This attempts to measure optimism (or pessimism) about the state of the economy. Depending on which indicator you consult, consumer confidence has either <a href="http://www.roymorgan.com/morganpoll/consumer-confidence/roy-morgan-business-confidence">declined</a> or <a href="http://www.tradingeconomics.com/australia/consumer-confidence">increased</a> slightly over the past few months.</p>
<iframe src="https://datawrapper.dwcdn.net/QG7D2/2/" frameborder="0" allowtransparency="true" allowfullscreen="allowfullscreen" webkitallowfullscreen="webkitallowfullscreen" mozallowfullscreen="mozallowfullscreen" oallowfullscreen="oallowfullscreen" msallowfullscreen="msallowfullscreen" width="100%" height="400"></iframe>
<p>As consumer confidence relates to consumption, business confidence is a good leading indicator of investment in the economy. This is often <a href="https://www.rba.gov.au/publications/bulletin/2009/dec/pdf/bu-1209-3.pdf">driven by</a> expectations about future profitability, which is in turn driven by expectations of demand by households, firms and foreign buyers. </p>
<p>There are a few business confidence indicators to choose from, and they have been <a href="http://business.nab.com.au/nab-monthly-business-survey-december-2016-2-22311/">steady</a> in recent months, indicating that investment will be flat in the coming three to six months. </p>
<p>Finally, export expenditure is driven by both growth in our major trading partners and Australia’s competitiveness, the latter being determined by our costs of production and the Australian dollar. Growth of our trading partners has <a href="http://www.rba.gov.au/publications/smp/2017/feb/pdf/statement-on-monetary-policy-2017-02.pdf">picked up</a> in recent months, particularly in China, and is around 4% on average.</p>
<iframe src="https://datawrapper.dwcdn.net/PfJXE/2/" frameborder="0" allowtransparency="true" allowfullscreen="allowfullscreen" webkitallowfullscreen="webkitallowfullscreen" mozallowfullscreen="mozallowfullscreen" oallowfullscreen="oallowfullscreen" msallowfullscreen="msallowfullscreen" width="100%" height="400"></iframe>
<p>Flat investment and government expenditure means that the predicted 3% GDP growth would have to come from consumption and export expenditure. Consumption currently is flat and exports tend to be volatile and uncertain. So take this number with a grain of salt.</p>
<p>In the end, if you are looking for a picture of the economy, the data in the federal budget is not much help. The data behind the forecasts of broad macroeconomic variables such as economic growth and unemployment are too aggregated to be of much use as indicators of future interest rates, household living standards or prospects for employment and growth in particular industry sectors.</p>
<p>When the budget is released, place the forecasts in the context of the other indicators we have about the economy.</p><img src="https://counter.theconversation.com/content/75777/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Ross Guest has previously received funding from the ARC but has no current ARC projects.</span></em></p>The budget is full of forecasts about where the economy is going, but other indicators are often more helpful.Ross Guest, Professor of Economics and National Senior Teaching Fellow, Griffith UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/763672017-04-18T14:22:15Z2017-04-18T14:22:15ZGloomy economic outlook is why Theresa May was forced to call a snap election<p>Many are asking why Britain’s prime minister, Theresa May, has called a general election despite <a href="https://www.theguardian.com/politics/2017/apr/18/the-many-times-theresa-may-ruled-out-an-early-election">repeatedly saying</a> that she would not do so. From the moment she first stood for the leadership of the Conservative Party in June 2016 she <a href="https://www.theguardian.com/politics/2016/jun/30/theresa-may-launches-tory-leadership-bid-with-pledge-to-unite-country">ruled out such a possibility</a>. In her Easter message on April 16 <a href="http://www.bbc.co.uk/news/uk-39607056">she suggested</a> that the country was uniting behind Brexit. Now she wants an election to resolve the issue after all.</p>
<p>But is that the real story behind this surprise announcement? Or has, as ever, economics got more to do with it? <a href="http://www.telegraph.co.uk/news/2017/04/18/theresa-mays-early-general-election-speech-full/">In her Downing Street address</a> announcing the election, May said:</p>
<blockquote>
<p>Despite predictions of immediate financial and economic danger, since the referendum we have seen consumer confidence remain high, record numbers of jobs, and economic growth that has exceeded all expectations.</p>
</blockquote>
<p>This, however, glosses over some quite significant economic facts. The reality is that Britain’s economy is not in a good state. </p>
<h2>Reading the economic runes</h2>
<p>The UK’s high street is expected to see the biggest drop in retail sales, excluding food, for nearly six years in the <a href="https://www.theguardian.com/business/2017/apr/11/uk-retail-sales-fall-living-costs">first quarter of 2017</a>. Rising inflation, now at a rate exceeding the Bank of England’s 2% target rate, and likely to stay there for some time to come because of deflation in the value of sterling and rising oil prices, was the <a href="https://www.ft.com/content/b423f32c-1dd4-11e7-b7d3-163f5a7f229c">suggested main cause</a> of the decline. Whatever the reason, it seems likely that consumers have realised that the post-Brexit honeymoon is over.</p>
<p>There is good reason for them to do so. The latest <a href="https://www.ons.gov.uk/employmentandlabourmarket/peopleinwork/employmentandemployeetypes/bulletins/uklabourmarket/apr2017">labour market figures</a> reveal that even though employment is technically at a record high, pay rises have been lagging. Regular pay in the UK in February was 1.9% higher than a year earlier, but is running below the 2.3% increase in prices. That means real living standards are falling. It is a trend that is likely to continue.</p>
<p>The usual recourse in this situation is for consumers to borrow. Consumer debt levels are already at such high levels, however, that the Financial Conduct Authority <a href="http://www.bbc.co.uk/news/business-39628039">has announced</a> it is to review the whole sector and its regulation because of the threat to financial stability that it represents. </p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/165622/original/image-20170418-32703-d8v6o0.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/165622/original/image-20170418-32703-d8v6o0.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=357&fit=crop&dpr=1 600w, https://images.theconversation.com/files/165622/original/image-20170418-32703-d8v6o0.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=357&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/165622/original/image-20170418-32703-d8v6o0.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=357&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/165622/original/image-20170418-32703-d8v6o0.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=448&fit=crop&dpr=1 754w, https://images.theconversation.com/files/165622/original/image-20170418-32703-d8v6o0.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=448&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/165622/original/image-20170418-32703-d8v6o0.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=448&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Consumer credit is beginning to dry up.</span>
<span class="attribution"><span class="source">shutterstock.com</span></span>
</figcaption>
</figure>
<p>The regulator may not need to worry though: as the Bank of England <a href="https://www.ft.com/content/9abf248a-202a-11e7-b7d3-163f5a7f229c?segmentId=080b04f5-af92-ae6f-0513-095d44fb3577">recently announced</a>, it seems that Britain’s banks have already reacted to the pressure on UK household incomes and the availability of consumer credit was tightened for the first time in six years during the first three months of 2017. The Bank of England also noted that credit availability was likely to get tighter as the year progressed. The option of borrowing to make ends meet and cover a shortfall in wages – that has so long been the British choice – may no longer be available for many.</p>
<p>And, as if to cap it all off, <a href="https://www.theguardian.com/money/2017/apr/15/average-uk-house-price-falls-1000-since-start-of-year">average UK house prices fell</a> during the first quarter of 2017. It can always be argued that this does not matter, and might even be good news (particularly for first-time buyers). That though is not the way the British take such news: rising house prices are their surest indicator of economic confidence. The reality is that this might just be draining away.</p>
<p>To add to these woes, as the government is loathe to admit, the UK still has a huge budget deficit. It’s hard to recall that the Conservative Party plan in 2010 was to fight an election in 2015 <a href="http://www.telegraph.co.uk/finance/budget/7505366/Budget-2010-live.html">with no deficit</a>. The 2017 election will be fought against the backdrop of the deficit for 2016-17 exceeding £50 billion and actually expected to rise next year, <a href="https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/597467/spring_budget_2017_web.pdf">with no prospect of this ceasing</a>.</p>
<p>The reality is then that, as ever with elections, there has been a mighty lot of spin from the prime minister’s announcement. The truth is May does not need an election to deliver Brexit and nothing that election will decide will stop parliament – whether it is opposition MPs or the House of Lords – interfering with the Brexit process, if it seeks to do so in the future. </p>
<p>The reality behind her change of mind is something much more commonplace. She has read the economic runes and thinks, as I do, that they do not present a pretty picture for her prospects. Come 2020, if she lets this parliament run its prescribed course, she would face a difficult electorate, fractious at the cost of a Brexit that may well have delivered on little of its promises. Calling an election now then, when the going still looks good, is May’s best chance of ever becoming an elected prime minister. In that circumstance she has succumbed to vanity, as all politicians do. Britons might all, quite literally, pay the cost of that.</p><img src="https://counter.theconversation.com/content/76367/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Richard Murphy receives funding from a Horizon 2020 grant from the EU paid to City, University of London. He is a member of Tax Research LLP. That organisation can make no financial gain from this article. Nor can the Fair Tax Mark Limited or Cambridge Econometrics Limited of both of which he is a director. Richard Murphy is not a member of any political party. </span></em></p>Theresa May has read the economic runes – and called an election while she still confidently can.Richard Murphy, Professor of Practice in International Political Economy, City, University of LondonLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/538292016-02-23T16:23:10Z2016-02-23T16:23:10ZEconomic forecasting: why it matters and why it’s so often wrong<figure><img src="https://images.theconversation.com/files/112372/original/image-20160222-25898-1err9e8.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">South Africans take their cue from what Finance Minister Pravin Gordhan says about the country's economic outlook.</span> <span class="attribution"><span class="source">Reuters/Mike Hutchings</span></span></figcaption></figure><p>Anybody who has seen a convertible caught in a rainstorm understands the importance of weather forecasts. And the expectation that the forecast is in fact accurate and reliable. Economies, like weather systems, are complex. But instead of having a foundation based on predictable laws of physics, they are built on human behaviour. Some would argue predictable human behaviour.</p>
<p>With all the information available to Homo Economicus, one naturally wonders how he (according to this Latin name, he is male) makes choices. Being completely rational and unbiased, which is the entity most likely to guide his decisions?</p>
<p>He is most likely, being rational and unbiased, to follow the forecasts of the entity that is reliable and has been consistently accurate over a period of time. In the New York Times bestseller <a href="http://www.nytimes.com/2008/03/16/books/review/Berreby-t.html?_r=0">Predictably Irrational</a>, Professor Dan Ariely explains that most people are very unlike Homo Economicus. If anything, they are completely irrational. Despite this, they behave in a predictable fashion. </p>
<h2>Why predictability matters</h2>
<p>Predictability builds confidence and certainty in an economy. Individuals feel more optimistic. Their decisions become more efficient. Inaccurate forecasts, whether they underestimate or overestimate, incur additional costs. They lead the economy astray. Forecasts are therefore crucial for all economic and business activity. Looking into the future involves uncertainty and risk and the fact that forecasts may be inaccurate creates a serious dilemma for policy makers. As a recent <a href="http://www.tulsaworld.com/archives/a-cracked-crystal-ball-for-economists/article_2154f32e-52f1-59ec-978e-016e29a97739.html">headline</a> so aptly infers: economists’ crystal balls are cracked.</p>
<p>The national treasury in any country is, among other things, responsible for managing the government’s finances and allocating funds to the relevant departments. When Homo Economicus listens to the budget speech and the national treasury forecasts, he forms his expectations, which determine his behaviour. This is regardless of his occupation. The quality, accuracy and reliability of these forecasts are therefore of utmost importance.</p>
<h2>The challenges of forward-looking forecasts</h2>
<p>The forward-looking nature of policy deliberations stems from the fact that there are lags associated with the response of economic activity to variations in macroeconomic policy changes.</p>
<p>Forecasting accuracy, especially over longer horizons, is equally important for fiscal policy credibility. The role of forecasting becomes crucial. The primary focus for forecasters should not be making highly specific or detailed numerical forecasts. Rather they should provide a general indication of the likely environment in which forward-looking policy needs to be <a href="http://www.treasury.gov.au/ConsultationsandReviews/Reviews/2012/Forecasting-Methodology-Performance/%7E/media/Treasury/Consultations%20and%20Reviews/Reviews%20and%20Inquiries/2012/Forecasting%20Methodology%20Performance/PDF/AutumnRoundup-1996.ashx">formulated</a>. </p>
<p>Macroeconomic forecasts done by any entity – private sector companies like <a href="http://thomsonreuters.com/en.html">Thompson Reuters</a>, agencies such as the International Monetary Fund or the national treasury office – begin with an internal forecasting process. These preliminary estimates can be generated through:</p>
<ul>
<li><p>using complex models</p></li>
<li><p>pure judgement based on the perturbations of recent events.</p></li>
</ul>
<p>For example, if central banks want to achieve a target for inflation they need to be able to forecast inflation and adjust policy accordingly.</p>
<p>The “official” forecasts of the National Treasury of South Africa are usually made biannually. The first, just before the start of the financial year, coincides with the day the finance minister delivers his budget speech. The second happens when the medium term budget is reviewed towards the end of the year.</p>
<p>A common practice is to provide estimates of revenue and expenditure for the current year as well an extra three years. In addition, the treasury includes its own estimates of broad macroeconomic indicators such as GDP growth and inflation. For the current year, the forecasts of these indicators take the form of a point estimate. For years beyond the budget year, these broad macroeconomic parameters take the form of projections rather than definitive estimates. </p>
<p>Before publishing, the preliminary projections are frequently compared to those made by the private sector, namely Consensus, Reuters and Bloomberg. If they differ significantly, they are often reconsidered and <a href="http://www.treasury.gov.za/comm_media/speeches/2014/2014070101%20-%20Reuters%20Economist%20of%20the%20Year.pdf">updated</a>. </p>
<p>Without a crystal ball, the forecasts are ultimately a mixture of science that has been generated through carefully evaluated econometric systems. And a healthy dose of artful judgement and revision.</p>
<p>While the private sector in most industrial countries generates dozens of macroeconomic forecasts, official forecasts generally only emanate from two or three government agencies. Thus the quality, accuracy and reliability of the forecasts by central banks and the treasury become paramount. </p>
<h2>Getting it wrong more times than getting it right</h2>
<p>Studies reveal the inability of forecasters to correctly or timeously predict outcomes. Based on a sample of 63 industrial and developing countries, a <a href="https://www.researchgate.net/profile/Prakash_Loungani/publication/4960196_How_accurate_are_private_sector_forecasts_Cross-country_evidence_from_consensus_forecasts_of_output_growth/links/09e4150e9af982eb9e000000.pdf">study</a> by Prakash Loungani at the International Monetary Fund is revealing. It showed that private sector forecasters were only able to predict two of the 60 recessions that occurred over the sample while the majority remained undetected.</p>
<p>Professor Philip Tetlock also spent many years <a href="http://press.princeton.edu/titles/7959.html">researching</a> the accuracy of forecasts – specifically in a political realm. After collecting and analysing 28 000 predictions from 284 experts, he found that the average expert’s forecasts were only slightly more accurate than random guessing.</p>
<p>This ubiquitous failure to make predictions in an uncertain world has called to question the reliability of “official” forecasts generated by government and inter-governmental institutions as well as those from the private sector.</p>
<h2>The answer</h2>
<p>A fundamental component of the global environment is uncertainty. Rather than expecting forecasts to foresee events, Homo Economicus should rationally accept that uncertainty exists. As <a href="http://www.insead.edu/facultyresearch/research/details_articles.cfm?id=28150">Makridakis et al</a> suggest: use forecasts to estimate the uncertainty, and then double the range. This is because people are conditioned to underestimate uncertainty and should therefore not believe any predictions about the future. Rather develop plans that will be sensitive to surprises. </p>
<p>Despite their poor track record, forecasters still play a vital role. They are integral to establishing even a general sense of the future. The practice of forecasting can therefore not be relegated.</p>
<p>As author Cullen Roche <a href="http://www.pragcap.com/why-economic-and-market-forecasting-matters-to-everyone/">explains</a>:</p>
<blockquote>
<p>It’s sort of like preparing to set sail across an ocean. You would never claim to be able to predict the weather or conditions you might encounter, but you can understand your path, potential weather patterns and how your vessel operates so you can increase the odds that you will make if there in one piece.</p>
</blockquote><img src="https://counter.theconversation.com/content/53829/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Forecasts are crucial for all economic and business activity. But looking into the future involves uncertainty and risk. Forecasts may be inaccurate, which creates a serious dilemma for policy makersFatima Bhoola, Lecturer in Economics, University of the WitwatersrandMargaux Giannaros, Lecturer in Economics, University of the WitwatersrandLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/346212014-11-26T11:46:17Z2014-11-26T11:46:17ZThe OECD signals a two speed global recovery, and Britain could drift into the slow lane<figure><img src="https://images.theconversation.com/files/65514/original/image-20141125-4234-11pkicz.jpg?ixlib=rb-1.1.0&rect=52%2C41%2C916%2C553&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">All bark no bite? Green shoots of growth hide risks as well as opportunities.</span> <span class="attribution"><a class="source" href="https://www.flickr.com/photos/clairity/233646986/in/photolist-oyLnQN-4KGLQd-dYPs6L-boKDBC-3ccJba-fcPay5-9SKQC2-pcj5zn-fKVXyE-edvoCC-6r1hT8-oHpeoJ-mDv7j-4GABHF-bixFLg-dnf1dp-8XWKmJ-vQS5G-4KhZ3f-4Kid3L-gtaKNf-9FrE1n-4L1Avp-enpSDa-hMZvpq-5xi6KV-m36S4Z-4w2sPA-9sJwFf-4zD2pN-7z9fig-dw33yy-4KifQy-iMq89G-nKN9w4-4Yr4tn-nqd6Wi-dDKJX-oXKJKr-fjiwnc-6h5njn-6dyK72-jcov8b-6ahuYi-jzaCaE-8ywHjf-9SR1rJ-hperU6-7WF1k-4Ff5Sq">Sharon Mollerus</a>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span></figcaption></figure><p>Not too long ago, cynics were wondering if David Cameron’s fears over the global economy were a ploy to shift blame for any flaws in the UK’s performance as we near the May 2015 general election. However, the publication of the Organisation for Economic Co-operation and Development’s <a href="http://www.oecd.org/newsroom/stronger-policy-response-needed-to-avoid-risks-to-growth-especially-in-the-euro-area.htm">latest Economic Outlook</a> can only make the British prime minister’s <a href="http://www.theguardian.com/commentisfree/2014/nov/16/red-lights-global-economy-david-cameron">“red warning lights”</a> flash a little brighter.</p>
<p>The headline forecasts for global growth from the OECD are for an increase from 3.3% in 2014 to 3.9% in 2016, but they mask considerable variations in the prospects of the leading economic powers. Brazil, India, and the United States are, if the OECD’s forecasts come to pass, likely to see growth rates accelerating. Meanwhile, China is expected to see its economy grow at an impressive 7% a year through to 2016. In contrast, the euro zone <a href="https://theconversation.com/japans-snap-election-is-about-more-than-just-abenomics-34394">and Japan</a> are expected to languish with annual growth rates around 1%. </p>
<h2>American dream</h2>
<p>What a difference a year makes. For many, doubts about the US recovery were finally set aside in 2014, so much so that the Federal Reserve <a href="https://theconversation.com/how-to-interpret-the-fed-as-it-ends-qe-and-morphs-into-a-hawk-33277">stopped its policy of quantitative easing (QE)</a>. Like many others, the OECD is pretty bullish on India after the torpor that set in during the run up to the national election in May. Japan shot itself in the foot by raising a consumption tax and the euro zone slides ever closer towards deflation. Indeed if the manufacturing sector’s falling producer prices defined inflation, as opposed to consumer prices, then much of the euro zone is already in serious trouble. </p>
<p>On the whole, the OECD found that governments have eased off on austerity, while central bankers are still expected to pull a rabbit out of the hat and turn stagnating economies around. Economic reforms have stalled in many countries. With the exception of Japan, policy surprises have been few and far between. And by and large, government leaders continue to duck the fundamental challenge of rebalancing national economies.</p>
<figure class="align-left zoomable">
<a href="https://images.theconversation.com/files/65513/original/image-20141125-4253-28cbnp.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/65513/original/image-20141125-4253-28cbnp.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/65513/original/image-20141125-4253-28cbnp.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=639&fit=crop&dpr=1 600w, https://images.theconversation.com/files/65513/original/image-20141125-4253-28cbnp.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=639&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/65513/original/image-20141125-4253-28cbnp.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=639&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/65513/original/image-20141125-4253-28cbnp.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=803&fit=crop&dpr=1 754w, https://images.theconversation.com/files/65513/original/image-20141125-4253-28cbnp.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=803&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/65513/original/image-20141125-4253-28cbnp.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=803&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Speed limits.</span>
<span class="attribution"><a class="source" href="https://www.flickr.com/photos/thatguyfromcchs08/2800472595/in/photolist-5gt9Wg-e9TRuy-mtKLtp-wnQ3p-6pRn4J-cu6Fc-xnEcg-694MVa-23xXY-bJTxoF-4me8vi-eomR-nUu6YR-cQgK7U-iWF95x-i9ntie-5TnKcA-pzJ8GP-BQKJf-8dhZfM-npRJco-cQgMrN-7HscSQ-bXbUWJ-5UgoU2-9RgmMZ-cQgKLW-hE9Cz7-cQgLf7-9iG3Qb-9saDQZ-at4qz-5JWdrK-dab4FH-ds3CfT-bjueSp-eomV-5pYkR-fuL35L-9h9mWa-iVjfn3-briF9M-ddvZCT-6mGLh8-9BtMnr-6eoRue-5h66NK-71hLEg-PRHrU-efGSDx">Nathan E Photography</a>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span>
</figcaption>
</figure>
<p>In the meantime the divergence between rosy pre-crisis trends and present circumstances becomes clearer and clearer. World <a href="http://www.slideshare.net/oecdeconomy/advance-g20-release-of-oecd-economic-outlook">trade growth is markedly slower</a> than in previous recovery phases. Private investment rates <a href="http://www.slideshare.net/oecdeconomy/advance-g20-release-of-oecd-economic-outlook">remain below trend</a> in many industrialised economies. The OECD reckons that the maximum speed with which many countries can now grow without stoking high rates of inflation has slowed markedly. Economists are used to distinguishing between longer term trends and shorter term cycles; nowadays <a href="https://theconversation.com/hard-evidence-are-we-facing-another-financial-crisis-34331">a faltering recovery</a> appears to be undermining the drivers of longer-term living standards.</p>
<h2>Oil well</h2>
<p>The combination of low growth and falling prices is relentlessly pushing up <a href="https://theconversation.com/david-camerons-red-light-zone-is-closer-to-home-than-he-thinks-34333">private sector debt levels</a> in Europe, while borrowing binges in many emerging markets go unchecked and add to financial vulnerabilities. Still, at least we have seen the end of last year’s <a href="http://www.imf.org/external/pubs/cat/longres.aspx?sk=41890">“taper tantrum”</a> in many emerging markets sparked by the end of US quantitative easing, and the OECD notes that most indicators of financial market instability have calmed down.</p>
<p>One factor, likely to be a net positive for the global economy, but which the OECD has given little attention to is falling oil prices. The price of a barrel of Brent crude is down 29% this year (see the chart below). Some experts estimate that the fillip to consumption spending that resulted from lower oil prices will, among other effects, boost global growth by between 0.5-1.5% in 2015, which in the current era of relatively slow growth is pretty significant. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/65512/original/image-20141125-4244-sqj0d8.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/65512/original/image-20141125-4244-sqj0d8.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/65512/original/image-20141125-4244-sqj0d8.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=457&fit=crop&dpr=1 600w, https://images.theconversation.com/files/65512/original/image-20141125-4244-sqj0d8.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=457&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/65512/original/image-20141125-4244-sqj0d8.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=457&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/65512/original/image-20141125-4244-sqj0d8.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=574&fit=crop&dpr=1 754w, https://images.theconversation.com/files/65512/original/image-20141125-4244-sqj0d8.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=574&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/65512/original/image-20141125-4244-sqj0d8.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=574&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">A year in oil.</span>
<span class="attribution"><a class="source" href="http://www.nasdaq.com/markets/crude-oil-brent.aspx?timeframe=1y">www.nasdaq.com</a></span>
</figcaption>
</figure>
<p>Expect a positive impact on many governments’ fiscal deficits too, especially in those countries where energy subsidies are rife and where climate change concerns are being used as a pretext to increase taxes on oil. Of course, given the rollercoaster of <a href="https://theconversation.com/why-reducing-energy-consumption-through-a-recession-doesnt-really-count-33602">oil prices</a> during the past decade plus the growing interest in shale gas, forecasting energy prices is particularly fraught. Still, so long as oil prices stay low, then eventually this is going to feed into the global economy.</p>
<h2>Danger zones</h2>
<p>All of which might make you think we were home and dry. The concern remains, however, that policymakers in the euro zone and Japan will resort to more desperate measures. Here the OECD report contained the results of a simulation that is almost certainly going to raise eyebrows in many national capitals. The OECD simulated the impact of Japan and the euro zone devaluing their currencies by 1% in each of the next 10 quarters on trading partners’ growth. These devaluations would cut into China, India, and Russia’s growth rates in 2015 and 2016. </p>
<p>According to the forecast, however, the country most harmed will be the UK, with its <a href="https://theconversation.com/ties-that-bind-the-british-jobs-data-that-really-shows-the-value-of-the-eu-34032">extensive trading ties to the continent</a>. The OECD reckons that these relatively mild devaluations would by 2016 knock half a percentage point off British growth, further slowing an already weak recovery. If so, Cameron’s fears about the global economy may be valid after all.</p><img src="https://counter.theconversation.com/content/34621/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Simon Evenett does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Not too long ago, cynics were wondering if David Cameron’s fears over the global economy were a ploy to shift blame for any flaws in the UK’s performance as we near the May 2015 general election. However…Simon Evenett, Professor of International Trade and Economic Development, University of St.GallenLicensed as Creative Commons – attribution, no derivatives.