Australia | Nov 11 2010
By Greg Peel
“This is an ambitious project that requires many courageous assumptions,” says Westpac, offering somewhat of a caveat to its latest economic forecasts, “Some of them will not eventuate and the accuracy of individual time lines will suffer”.
Regular readers will know that I am often scathing about the government's definitive declarations regarding a return to surplus of the Australian budget by 2013. How on earth can anyone promote such specific targets three years hence, especially when no one ever saw the GFC coming? It is not, however, the practice of budgetary forecasting I am actually scathing about. It's just the resultant attempt at political leverage and assumption a naïve electorate will lap it all up and vote accordingly which really gets me steaming.
Everyone must budget – from households to corporations to governments – in order to settle on longer dated policy, and in so doing one cannot avoid making various assumptions. Thus if the government took a leaf out of the Westpac economists' book, with regards to the quote above, and simply told us “Our current projections suggest a return to surplus by 2013 making certain assumptions about commodity prices etc, which is good news, but clearly there will still be challenges ahead and the government stands ready to deal with those,” then suddenly some credibility would be restored.
Westpac has undergone the extensive exercise of calculating decade-long forecasts in its report entitled “A Path To 2020”. The forecasts require various assumptions on economic growth or otherwise over the period for Australia, the advanced economies and the emerging economies, using forecasts for interest rates, currencies and commodity prices among other inputs. The economists are clearly not expecting to hit any nails on heads, but suggest “it is the major structural themes and their interaction with the cycle that should be the focus”.
There are some major themes within the assumptions. Westpac expects ongoing deleveraging in the advanced world, further fiscal controls and problems with dealing with an ageing population. There will be massive capital flows into the emerging markets where there will be growing intensity of resource consumption as urbanisation continues. Ongoing low interest rates in the advanced world will reflect ongoing stunted rates of capacity utilisation (ie plant and labour).
Westpac does not see any excessive inflation or hyperinflation problem down the track due to current excessive levels of global liquidity. Rather, controlled inflation will support commodity price rises. Any protectionist “war” is not seen as likely given G20 meetings will encourage cool heads. Ultimate Asian currency appreciation will help to soothe.
Westpac predicts five phases of global economic cycle in the next decade. From now to 2013, things will roll along as they have been (advanced economies subdued, emerging economies above trend, Australia riding on the coat tails). In 2013 there will be a dip as commodity prices ease off from their stimulated run but only briefly, because 2014-16 will see India really take the baton and boom with China simply “above trend”. Australia, too, will boom.
Enjoy it while it lasts, because after every boom comes the inevitable bust and that will occur in 2017-19. Growth in emerging markets (if we can still call them that by then) will fall to simply “subdued” while the economies of the advanced world and Australia will be “weak”. Finally, in 2020, we'll see a recovery out of the bust as emerging markets return to trend growth.
Now don't say you haven't been warned.
Within the detail, Westpac sees the RBA cash rate as peaking out only at a comparatively low 6.25% given an expected lengthy period of low rates in the US. The Aussie dollar will rock and roll as usual, with the standard floor (say mid sixties) in place but with upside to as much as US$1.30.
What Westpac has specifically not tried to model is any impact from exogenous but material issues such as carbon pricing, water pricing or financial regulation changes. Rather, any developments on these fronts will be modelled in once established.
So now it's over to Zager and Evans:
In the year 2525 / If man is still alive / If woman can survive / They may find…