Media Release: Tuesday, 14 February 2017 Embargoed: until Tuesday, February 14 at 6:00 pm News Date: Wednesday, 15 February 2017 Australia set for moderate economic growth in the year ahead RBA on hold this year, but risk of a rate cut not ruled out RESULTS OF ANNUAL SURVEY OF ABE EXECUTIVE COMMITTEE The results of this survey will be discussed at the ABE Annual Conference to be held Wednesday 15 February from 7:15 am until 10:00 am at the Reserve Bank of Australia, 65 Martin Place, Sydney. For detail see abe.org.au > events. For detail of Executive Committee membership, see page 6. For enquiries about this release, contact: Stephen Halmarick 0411 049 693 or Besa Deda 0404 844 817 For enquiries about the conference on Wednesday morning, contact Tony Westmore 0419 256 339 Stephen Halmarick, Chairman, Australian Business Economists, commented: I am pleased to release the annual survey of financial and macroeconomic forecasts made by members of the Executive Committee of the Australian Business Economists (ABE). Note: some members were unable to contribute to the survey due to their positions in the public sector. Highlights of the Annual Survey of the ABE Executive Committee The Committee expects the Australian economy in 2017 to grow at a pace that is similar to that of 2016. Economic growth is expected to be moderate and driven by strength in net exports and growth in household consumption. Dwelling investment will also add modestly to growth, but business investment is expected to contract again. After an estimated growth rate of 2.4% in 2016, the median forecast is for GDP growth of 2.5% in 2017. Economic growth is expected to strengthen in 2018 to 2.8%. The range of forecasts for GDP growth next year from the Committee is wide, ranging from 2.0% to 3.3%. This broad range reflects the uncertainty clouding the economic outlook. A strong rise in dwelling investment, very strong growth in exports, and only a modest contraction in business investment are likely required to deliver a growth forecast at the higher end of the forecast range. Low interest rates and strong population growth have supported dwelling investment. Dwelling investment is forecast to grow by 1.4% in 2017, before shrinking by 4.0% in 2018. These projections follow estimated growth in dwelling investment of 8.9% in 2016. The pipeline of dwelling investment is starting to ease, suggesting the construction cycle will turn as we near 2018. While the mining investment downturn continues, increased production capacity is driving exports. The Committee expects export volumes to grow by 7.5% in 2017 and by 6.3% in 2018. Import growth is not expected to be as strong over the forecast period due to tame domestic demand and the low Australian dollar. A solid contribution to economic growth from net exports is expected in 2017 and 2018, of 0.6 percentage points in each year. Published by Australian Business Economists 15 February 2017
Low interest rates, firm growth in house prices and a relatively tight labour market have given support to household consumption. Soft wages growth, however, has limited growth in household spending. Household consumption growth is forecast to moderate slightly in coming years, to 2.5% in 2017 and 2.6% in 2018. Business investment, mainly mining investment, is forecast to continue dragging on economic growth over the next two years. Business investment is expected to fall by 2.5% in 2017, before improving to grow by 2.3% in 2018. These figures reflect expectations of the mining investment downturn running its course and non-mining investment picking up. The current account deficit (CAD) as a proportion of GDP is expected to improve substantially this year, but widen again next year. The international trade account will have a strong influence on the outcome. The median forecast from the Committee is for the CAD to be 1.3% of GDP in 2017 and 1.9% of GDP in 2018. These forecasts compare favourably to the outcome of 2.9% of GDP expected for 2016. The Australian economy was the beneficiary of a stronger terms of trade from 2003 until 2011, which assisted the economy during the global financial crisis. Since September 2011, the terms of trade has fallen sharply. A turnaround in commodity prices over last year has improved the outlook for the terms of trade. The Committee expects the terms of trade to jump by 9.5% in 2017, but to fall by 4.9% in 2018. The Committee expects employment growth to moderate this year. Following employment growth of 1.9% in 2015 and expected growth of 1.6% in 2016, the median forecast of the Committee is for 1.3% growth in 2017 and an expansion of 1.7% in 2018. The average pace of job growth over the past decade has been 1.7%. The Committee expects the unemployment rate to edge lower by the end of 2017 to 5.6% and fall again in 2018 to be at 5.5% by the end of 2018. The range of forecasts for the unemployment rate by the end of 2017 ranged from 5.3% to 5.7%. For the end of 2018, the range was 5.0% to 5.8%. The Committee expects growth in wages to remain weak over the next two years. The Committee expects the labour price index to rise by only 2.1% in 2017, following estimated growth of 2.0% in 2016. For 2018, an increase of 2.5% is the median forecast of the Committee. The Committee s expectations for headline inflation are towards the bottom of the RBA s 2%-3% per annum target range. Expectations for underlying inflation are below the target range. The median forecast for headline inflation growth in 2017 is 2.0% and 2.1% in 2018. Meanwhile, the median forecast for underlying inflation growth is 1.8% in 2017 and 2.1% in 2018. The Committee expects the RBA to leave the cash rate on hold at 1.50% for all of 2017 and 2018. However, the range of forecasts for the cash rate at the end of 2017 ranges between 1.00% and 1.50%, indicating that the Committee sees a risk of an easing. The Committee sees no risk of a tightening this year. In 2018, the range of forecasts is between 1.00% and 2.00%, revealing a much more divided Committee on the direction of the cash rate. 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 A$36.1 billion is expected in 2016/17, after an estimated deficit of A$39.6 billion in 2015/16. A further improvement to a deficit of A$26.6 billion is forecast for 2017/18. The Australian three-year/ten-year bond yield curve is forecast to steepen to 100 basis points by the end of June this year, from its current level of 78 basis points (i.e. as at 6 February 2017 close). However, the Committee then expects the yield curve to flatten slightly over the second half of 2017 before steepening again over 2018. Both Australian three-year and ten-year yields are expected to rise over the next two years. Published by Australian Business Economists 15 February 2017 Page 2 of 6
The Committee expects the Australian dollar to end 2017 weaker at US$0.7000, down from its current level of around US$0.7646 (as at 6 February 2017). The range of forecasts for the end of this year is wide at US$0.63-0.78 and for the end of 2018 US$0.65-0.80. The ASX200 share market index is forecast to be 3.2% higher (at 5,775) by the middle of this year and 7.2% higher (at 6,000) by the end of this year from its closing level of 5,597 on 6 February 2017. The ASX200 is then expected to increase a further 4.6% over 2018 to end the year at 6,275. The Committee was also asked to provide long-term forecasts for the economy. The median forecast for GDP growth in 2020 was 2.8%, a touch above the ten-year average. The unemployment rate is expected to be at 5.1% at the end of 2020 and the cash rate at 2.50%. Headline and underlying inflation are expected to grow by 2.40% and 2.50%, respectively, on average, in 2020. Finally, at the end of 2020 the Australian dollar is expected to be at US$0.7400 and the ASX 200 index to reach an all-time high of 6,900. This year the Committee was also asked a number of special questions on both the local and global economic outlook. The Committee was unanimous in expecting that Australia will continue its long-running economic growth cycle over 2017. Committee members expect that the contraction in GDP in Q3 2016 was a oneoff and another contraction is unlikely in Q4 of 2016. The Committee views a low chance of a recession occurring in Australia over the forecast period. The probabilities attached to a recession were under 25% with many members under 10%. The median expectation from the Committee is that the Reserve Bank will leave the official interest rate on hold for an extended period of time. A few Committee members continue to expect the Reserve Bank to cut the cash rate further in this easing cycle. But the Committee agrees that the Reserve Bank is close to the end of its easing cycle. Most Committee members do not expect a hike in the cash rate until 2018. On the issue of what should be the policy priorities of the Australian Federal Government in 2017, many Committee members highlighted the importance of budget repair. However, a few Committee members noted that the government should not be concerned about losing the AAA sovereign credit rating. Tax reform, particularly reform of company tax, the goods and services tax and tax concessions were notable themes in the responses from the Committee. Spending on infrastructure was also seen as an appropriate policy priority. The global prices of commodities, especially bulk commodities, lifted noticeably over 2016. The majority of Committee members expect this rally in commodity prices will not be sustained and that some retracement in prices is likely. However, the Committee does not expect commodity prices to return to their lows struck in early 2016. There was divergence in views regarding the outlook for China s economy and the consequent impact on commodity prices. Some members were more optimistic that fiscal stimulus would continue to support Chinese economic growth this year. Other Committee members thought that stimulus would be temporary; these members highlighted downside risks such as ongoing spare capacity, the cooling property market and a potential slowdown in credit growth. Most Committee members expect US President Trump s policies to boost US economic growth in the short-term. Over the medium to long-term, the view amongst Committee members was divided. Some Committee members are expecting a boom-bust economic scenario, expressing concern about the inflationary impact of policies, the ageing population and low productivity. Some other Committee members are forecasting a sustained boost to growth, with Trump s policies driving a lift in the potential rate of growth, boosting investment and spurring productivity. A few Committee members expressed concerns Congress would act to restrain fiscal stimulus or that uncertainty could undermine growth. Published by Australian Business Economists 15 February 2017 Page 3 of 6
The majority of Committee members expect the US Federal Reserve to raise the Federal funds target rate twice this year, by 25 basis points each time. Two Committee members expected just one rate hike and one member expected three rate hikes for this year. Some members noted a risk of more rate hikes if Trump s stated economic policies are implemented. Several Committee members indicated they expect any fiscal stimulus to impact in 2018 rather than 2017. The majority of Committee members indicated it was unlikely the Federal Reserve would be behind the curve this year. The final question for the Committee was around expectations for a debt crisis in China. The majority of the Committee does not expect a debt crisis in China to eventuate this year. The election this year of the 19 th Party Congress was viewed as one factor driving the Chinese government to support growth. Other factors highlighted as helping to avoid a debt crisis included the financial health of Chinese banks, a tightening of financial regulation of shadow banking activities and the return of rising prices. The Committee sees the Chinese Government as having the capacity to maintain stability. The high degree of government control over the financial sector was viewed as a means for debt restructuring to take place gradually, averting a debt crisis. The Committee overwhelmingly viewed China as better placed than most countries to deal with a crisis should it emerge. Published by Australian Business Economists 15 February 2017 Page 4 of 6
Table 1: Australian Business Economists (ABE) Annual Survey of the Executive Committee (All forecast variables are annual average % change unless otherwise specified) 2015 2016 Median Low High Median Low High Actual Median Low High 2017 (f) 2018 (f) National Accounts Household Consumption 2.7 2.7 2.7 2.8 2.5 2.1 2.7 2.6 2.1 3.2 Dwelling Investment 10.0 8.9 8.6 9.6 1.4-5.5 4.0-4.0-6.0 1.2 Business Investment* -8.9-10.2-11.7-9.0-2.5-5.0 0.1 2.3 0.4 4.8 Inventory (ppt contribution) 0.1 0.1 0.0 0.2 0.1-0.1 0.1 0.0-0.1 0.1 Exports 6.1 7.0 6.7 7.3 7.5 6.0 8.6 6.3 5.1 8.5 Imports 2 0.4 0.0 3.0 3.9 1.7 6.5 3.2 2.2 5.5 Net Export (ppt contribution) 0.2 1.3 1.3 1.4 0.6 0.2 1.3 0.6 0.0 1.5 GDP 2.3 2.4 1.7 2.4 2.4 2.0 3.3 2.8 2.1 3.3 Labour and Inflation Employment 1.9 1.6 1.1 1.8 1.3 0.9 1.8 1.7 1.2 2.0 Unemployment Rate (end period) 5.8 5.7 5.6 5.8 5.6 5.3 5.7 5.5 5.0 5.8 Labour Price Index 2.2 2.0 1.9 2.0 2.1 1.9 2.5 2.5 2.1 2.8 Headline CPI 1.5 1.3 1.2 1.3 2.0 1.7 2.5 2.1 1.5 2.6 Underlying CPI 2.2 1.6 1.5 1.7 1.8 1.6 2.2 2.1 1.5 2.3 0 Other 0 Terms of Trade -11.6-0.7-1.8 1.0 9.5 1.8 17.1-4.9-11.9-1.7 Current Account Deficit (% of GDP) -4.8-2.9-4.2-2.7-1.3-3.1-0.1-1.9-3.8-0.8 Headline Cash Budget ($Abn)** -37.9-39.6-39.6-39.6-36.1-39.0-28.0-26.6-32.0-20.0 6 Feb 17 Actual Median Jun-17 (f) Low High Median Dec-17 (f) Low High Median Dec-18 (f) Low High Financial (all end period) Cash Rate 1.50 1.5 1.0 1.5 1.5 1.0 1.5 1.5 1.0 2.0 3-Year Government Bond Yield 1.91 2.0 1.6 2.3 2.2 1.7 2.5 2.5 2.2 3.0 10-Year Government Bond Yield 2.68 3.0 2.6 3.8 3.1 2.6 3.4 3.5 2.9 4.2 AUD/USD 0.76 0.72 0.67 0.78 0.70 0.63 0.78 0.74 0.65 0.80 ASX 200 5,597 5,775 5,600 5,900 6,000 5,700 6,200 6,275 6,200 6,350 2020 (f) Median Low High Longer-Term Outlook GDP 2.8 2.40 3.30 Unemployment Rate (end period) 5.10 4.70 5.60 Headline CPI 2.40 2.00 2.50 Underlying CPI 2.50 2.25 2.50 Cash Rate (end period) 2.50 2.25 3.25 AUD/USD (end period) 0.74 0.70 0.83 ASX 200 (end period) 6,900 6,800 7,000 Published by Australian Business Economists 15 February 2017 Page 5 of 6
ABE Executive Committee 2017 Chairman Mr Stephen Halmarick Secretary Mr Stephen Walters Treasurer Mr Joshua Williamson Chief Economist, Colonial First State Global Asset Management Chief Economist, Australian Institute of Company Directors Director Economic Analysis, Citi Research Assistant Treasurer and Secretary Mrs Besa Deda Chief Economist, St.George Banking Group Committee Members Mr Adam Donaldson Mr Bill Evans Mr Tom Ford Mr Tim Harcourt Mr Scott Haslem Dr Alex Heath Mr Robert Henderson Mr Ben Jarman Mr Peter Jolly Mr Tony Morriss Phil O'Donaghoe Ms Su-Lin Ong Mr Brian Redican Mr Warren Tease Mr Geoff Weir Ms Cassandra Winzenried Mr Richard Yetsenga Head of Fixed Income Research, Commonwealth Bank of Australia Chief Economist, Westpac Banking Corporation Fellow, Institute of Company Directors (Formerly Chairman, Resimac Limited) JW Neville Fellow in Economics, UNSW Business School Chief Economist & Head of Macro Research, Australiasia, UBS Head of Economic Analysis, Reserve Bank of Australia Retired (Formerly Chief Economist, Markets, National Australia Bank) Senior Economist, J.P. Morgan Head of Research & Managing Director, Global Markets Research, National Australia Bank Head of AUD/NZD Economics and Rates Strategy, Bank of America Merrill Lynch Senior Economist Australia and New Zealand, Deutsche Bank Chief Economist & Head of Australian Research, RBC Capital Markets Chief Economist, NSW Treasury Corporation Division Head, Macroeconomic Conditions Division, Treasury Managing Director, Financial Sector Services Pty Ltd Senior Economist, Export Finance & Insurance Corporation Chief Economist, ANZ Australian Business Economists ABN 60 959 647 104 PO Box 7267 Bondi Beach 2026 Australia tel: 0419 256 339 fax: 02 9365 6067 Disclaimer: The Information contained in this report: does not constitute an offer, or a solicitation of an offer, to subscribe for or purchase any securities or other financial instrument; does not constitute an offer, inducement or solicitation to enter a legally binding contract; and is not to be construed as an indication or prediction of future results. The Information is general and preliminary information only and while ABE has made every effort to ensure that information is free from error, ABE does not warrant the accuracy, adequacy or completeness of the Information. The Information may contain material provided directly by third parties and while such material is published with necessary permission, ABE accepts no responsibility for the accuracy or completeness of any such material. In preparing the Information, ABE has not taken into consideration the financial situation, investment objectives or particular needs of any particular investor and recommends that investors seek independent advice before acting on the Information. Certain types of transactions, including those involving futures, options and high yield securities give rise to substantial risk and are not suitable for all investors. Except where contrary to law, ABE intends by this notice to exclude liability for the Information. The Information is subject to change without notice. Published by Australian Business Economists 15 February 2017 Page 6 of 6