The annual financial and macroeconomic forecasts made by members of the Executive Committee of Australian Business Economists has been released.
This is essentially a group of Australia’s top market economists getting together to aggregate their predictions for the year ahead. Some of them work for government and couldn’t make contributions to the forecasts.
A key takeaway is that the economists believe a patchy economic recovery will continue and the Reserve Bank (RBA) will hold a move on interest rates until late 2015.
The bulk of the committee expects the RBA to cash interest rates to rise to about 3% from 2.5%. There was one committee member, out of 19, who expected a cut, not a hike.
“The timing of the first rate hike is largely forecast to occur in the second half of next year,” the economists say.
The report includes this table showing the forecasts for key economic data points.
The ASX200 share market index is forecast to be 2.9% higher by the middle of next year.
And the Australian dollar is predicted to finish 2014 at US $0.88 and then depreciate and end next year at $0.83.
Inflation will be between the RBA’s 2% to 3% range.
And jobs growth in 2015 is expected to lift to 1.5% and in 2016 to 1.8%, from 1% expected in 2014.
The bulk of the committee believe the unemployment rate is close to a peak. Most expect the unemployment rate peak to be 6.25%. The range of forecasts was 6.1% to 7%.
The majority of committee members thought that a significant correction in housing was unlikely, although a few saw that risks of a correction rising.
Most members pointed to the fundamentals supporting housing demand, including low interest rates and strong population growth.
Below, taken from the report (with some edits) are the details of the forecasts for a range of economic factors.
- GDP growth next year is expected to be driven by robust growth in dwelling investment and net exports. The range of forecasts for GDP next year from the committee is wide – ranging from 2.7% growth to as high as 3.5%. This broad range reflects the higher-than-usual uncertainty clouding the economic outlook. A significant lift in the non-mining segment of the economy is required to deliver a growth rate at the higher end of the forecast range.
- Housing investment is forecast to increase by 7.5% in 2015 and rise by a lower 1.4% in 2016. Low interest rates, robust population growth and underlying pent-up demand are expected to continue to underpin the upswing in dwelling investment.
- The mining investment downturn is deepening and the export phase is kicking in. This is underscored in the strong rates of growth the Committee is forecasting for exports. Exports are expected to grow by 7.0% in 2015 and by 7.2% in 2016. Import growth is not expected to keep pace with exports, due to a softer profile for the AUD and a decline in capital imports growth. A firm contribution to economic growth from net exports of 1.3 percentage points is expected next year and again in 2016.
- Household consumption is forecast to pick up modestly in 2015, from an estimated growth rate of 2.5% in 2014 to 2.7% in 2015. Low interest rates, strong population growth and the upswing in housing are important factors helping to underpin household consumption. However, consumer sentiment remains subdued and a risk to the outlook. Wages growth is also soft.
- Business investment, mainly mining investment, is forecast to be the big drag on growth in the next two years. Business investment is expected to fall 4.0% in 2015 and decline by 1.7% in 2016. The low end of estimates has business investment falling as much as 7.3% and 8.3% in 2014 and 2015, respectively.
- The international trade account will have a strong influence on the current account. The current account deficit (CAD) as a proportion of GDP is expected to improve next year and in 2016. The median forecast is for the CAD to be 2.9% of GDP in 2015 and just 2.2% in 2016, an improvement from 3.1% expected in 2014.
- The Australian economy has benefitted considerably from a high terms-of-trade over much of the past decade, particularly during the global financial crisis. But the terms of trade peaked in the September quarter of 2011. The Committee forecasts a sharp fall in the terms of trade of 3.9% in 2015, followed by another fall of 2.0% in 2016. These falls mean the economy will experience a net transfer of income to the rest of the world
- The committee expects employment growth to pick up next year. Jobs growth in 2015 is expected to lift to 1.5% and in 2016 to 1.8%, from 1.0% expected in 2014. The unemployment rate is, therefore, expected to improve, finishing the year in 2015 at 5.9% compared with 6.2% expected at the end of 2014. In 2016, the unemployment rate is expected to fall to 5.7% by the end of the year. There were a wide range of estimates for next year from the Committee, however: 5.7% to 6.7%. In 2016 the range of forecasts from the Committee is 5.3% to 6.3%.
- With the unemployment rate showing only modest improvement next year, the growth of the labour cost index is expected to be moderate, remaining below the RBA’s unofficial “line in the sand” of 4.5%. The Committee estimates the labour cost index to grow by 2.9% next year and by 3.1% in 2016. If wages grow at these estimates, it would not provide any significant pressure on inflation.
- Headline inflation is forecast to hug close to the middle of the RBA’s 2% to 3% per annum target band next year and the year after. It is a similar story for underlying inflation. Headline inflation is forecast to be 2.5% in 2015 and 2.6% in 2016 and underlying inflation is forecast to be 2.4% in 2015 and 2.6% in 2015.
- Interest rates. The committee expects the RBA to be on hold until the second half of next year. The median forecast is for the cash rate to remain at 2.50% by the end of June next year and to reach 3% by the end of December next year. The range of forecasts for the cash rate for the end of next year is, however, wide at 2.50% to 3.25%.
- The Federal Government’s headline budget deficit is expected to improve over the forecast period, according to the median forecast of the Committee. A deficit of $A32.5bn is expected in 2015/16, after an expected deficit of $A50.0bn in 2014/15. A further improvement to a deficit of $A22.0bn is forecast for 2016/17.
- The Australian dollar is forecast to finish 2014 at US$0.8800 and then depreciate and end next year at $US0.8300. The range of median forecasts is, however, a very wide $US0.8000-$US0.9200. The softer profile is consistent with the moderation expected by the Committee in Australia’s terms of trade
- The ASX200 share market index is forecast to be 2.9% higher by the middle of next year, from the 5,613 level the Committee expects the ASX 200 index to be at the end this year. The ASX200 is then expected to rally a further 3.5% in the second half of next year to finish 2015 at 5,975. The high end of the forecasts includes the ASX 200 reaching the 6,150 level in 2015; the ASX 200 has not breached the psychological barrier of 6,000 since the 10th of January 2008.
- The Committee was also asked to provide their long-term forecasts for the economy. The median forecast for GDP growth in 2017 was 3.1%, a little above the long-term trend rate for the economy. The unemployment rate is expected to be at 5.4% at the end of 2018 and the cash rate at 4.00%. Meanwhile, headline and underlying inflation were expected to grow by 2.50%, on average, in 2018. Finally, at the end of 2017 the Australian dollar was expected to be at $US0.8000 and the ASX 200 index at a near all-time high of 6,800.