Economic scenarios for Australia in 2013
Australia has a resilient economy but it is not exempt from cycles. While our last recession was in the early 1990’s, there have been near misses in 2000 (associated with the introduction of GST) and 2008/09 (associated with the GFC). We have developed some scenarios about Australia’s economy in 2013 to point out the risks which need to be factored in to planning by businesses, governments, and consumers.
Scenarios are important because economic forecasts are sometimes very wrong. The vast majority of economic forecasters did not see the GFC coming:
Four times a year, the Australian Financial Review (AFR) surveys economists about their forecasts for the next 18 months or so. In their survey published on 5 November 2007, AFR's economics editor Alan Mitchell described the forecasts of the 26 economists as "Another champagne year for Australia". Not one of them predicted that Australia's economic growth would slow significantly from late 2008. Their forecasts for 2007/08 averaged 4.1% after growth in 2006/07 of 3.8%. The outcome was 3.8%. But far worse were the forecasts for 2008/09. The average was 3.5% with a range from 2.9% (BIS Shrapnel) to an incredible 4.9% (HSBC). The outcome was 1.4%! Not one of the 26 economists foresaw the Global Financial Crisis and its impact on Australia's economy.
The slowdown started in earnest in the December 2008 quarter - annual growth slumped to 1.4% and averaged 1% for the following three quarters.
The Reserve Bank of Australia didn't see it coming. They were still lifting interest rates in March 2008! Then they slashed interest rates by 4% between September 2008 and February 2009.
The head of Australia's Treasury department, Ken Henry, didn't have a serious slowdown on his radar in early 2008. He recently confessed (on ABC's 7:30 Report of 15 May 2012) that in late February 2008 he was asked by the Prime Minister (Kevin Rudd) "what's the worst thing that could happen?" He said that "my brain was not in that space and it should have been and it took me a while to understand he was talking about the possibility of a Global Financial Crisis hitting Australia and how that would affect Australia. And I think that's to his very great credit that he was so far ahead of where the world was and a long way ahead of where we were in the Treasury ...".
Surely economic forecasters generally and the Reserve Bank and Treasury in particular should have seen it coming much sooner or at least developed scenarios along with detailed plans for monetary and fiscal policy. There was no monetary or fiscal policy change until late 2008 by which time the storm had already hit.
It was clear to me from mid-2007 that there was about a 30% chance that Australia's economy would slow suddenly from mid-2008. I saw the distinct possibility that the confluence of three factors could bring this about. First, it was likely that the Reserve Bank of Australia would lift interest rates too high - and so they did with four hikes of 0.25% between August 2007 and March 2008. Second, the sub-prime crisis in the United States of America had the potential to slow their economy and, indirectly through China, Australia's economy. Third, I saw it as likely that the Chinese economy would slow after the 2008 Beijing Olympics as massive reconstruction of the whole of Beijing came to a halt - resulting in a slowing of demand for our commodities.
With scenarios, we can develop robust, adaptable plans. We will be less likely to have to react when it is already too late.
The major components of Australia’s economy are household consumption (56%); private investment (23%); exports (19%); and government consumption (18%). Of these, private investment and exports are the most volatile. Normally, the boom and bust cycles are determined by household consumption, private investment, and exports. But at present, the federal government and several state governments are determined to slash spending and so this component is relevant for the development of scenarios for 2013.
Boom and bust times occur when two or more of these components reinforce each other. In the recession of the early 1980’s, household consumption was weak and both private investment and exports shrunk. In the boom of 2007, household consumption, private investment, and export volumes all grew strongly.
Weak economic growth is also often associated with both weak growth overseas and policy errors in Australia. For example, in the slowdown of 2000/01, a recession in the US (including the “tech wreck”) and a collision between fiscal policy (introduction of the GST in July 2000) and rising interest rates (the last in August 2000). Similarly, the Reserve Bank was lifting interest rates just before the GFC hit.
We have identified four scenarios as described in the table below. A description of the key driving forces, and monitoring charts, is being prepared and will be available by the end of October at www.foreseechange.com.au. .
2013 scenario assumptions and outcomes