Suddenly, economic forecasters are optimistic.
Six months ago the forecasting team assembled by The Conversation was expecting Australia’s recession to continue into 2021, sending the economy backwards a further 4.6% throughout the year.
This morning, in the survey prepared ahead of the Reserve Bank board’s first meeting for the year and an address by the Reserve Bank governor to the National Press Club on Wednesday, the same forecasting team is upbeat.
It expects the recovery that began in the September quarter of last year to continue, propelling the economy forward by a larger than normal 3.2% throughout 2021, with growth slowing to more sedate 2.1% per year by the middle of the decade, still well above than dismal 1.7% per year expected six months ago.
The unemployment rate is now expected to remain near its present 6.6% throughout 2021, instead of soaring to almost 10% as expected six months ago.
But improvement in the unemployment rate is expected to be slow, and as house prices and share market prices climb, most of the panel expect the Reserve Bank to lose its patience and begin to lift interest rates from their emergency lows before the end of next year, ahead of its published schedule.
The 21-person forecasting panel includes university-based macroeconomists, economic modellers, former Treasury, IMF, OECD, Reserve Bank and financial market economists, and a former member of the Reserve Bank board.
Only two of the panel expect the economy to shrink further in 2021.
The rest expect the economy to grow, two of the panel by at least 5%, something that isn’t out of the question given that the economy shrank by 7% during the worst three months of the 2020 coronavirus restrictions and clawed back only 3.3% in the three months that followed.
Panellist Saul Eslake who forecast growth of 3.5% in 2021 six months ago is now forecasting growth of 5.25%, saying the transition away from JobKeeper and other supports has been going more smoothly and the property market and residential building market have holding up much better than he had expected.
Growth will be constrained by unusually slow population growth, a gradual tightening of government purse strings and anticipation of higher interest rates.
China’s 2021 growth, expected to be 4% six months ago, is now expected to be 6.3% as it reaps the fruits of having recovered early from its coronavirus crisis with its production systems intact. Panellist Warren Hogan cautions that longer term China is likely to place less importance on economic growth and more on military adventurism.
The continuing COVID crisis in the United States is expected to push its recovery out into the second half of the year as vaccination programs and President Biden’s stimulus measures take hold.
Although few on the panel expect unemployment to get much worse, most believe it will be many years before the unemployment rate shrinks to the 4.5% to 5% the Reserve Bank has adopted as a target.
Panellist Julie Toth says the end of JobKeeper in March will reduce the ability of struggling businesses to keep their employees. Closed boarders mean skill mismatches and shortages will grow alongside persistent unemployment and underemployment.
Other panellists warn of a “jobless recovery” as large organisations that held onto labour during the crisis start to shed staff as part of digitisation programs.
Annual wage growth, at present a minuscule 1.4% – the lowest in the 23 year history of the index – is not expected to improve at all in the year ahead, ending 2021 at 1.4%.
At the same time annual inflation is expected to climb from last year’s unusually low 0.9% to 1.6%, putting it above wage growth for the first calendar year on record, sending the buying power of wages backwards.
A broader measure of living standards, real net national disposable income per capita, which takes account of the hours worked in each job and other sources of income, is expected to continue to climb in 2021, continuing the recovery begun in last year’s September quarter after the precipitous slide of 8% during the first half of last year.
Household spending is expected to climb a further 3.4% in real terms, continuing the recovery begun in the September quarter after a slide of 13.8% in the first half of last year.
The panel expects the Reserve Bank to lift its cash rate from the present all-time low of 0.10% well ahead of the “at least three years” timeframe set out by the bank.
The bank had promised not increase the cash rate until actual inflation was “sustainably within” its 2% to 3% target range.
And it had moved the three-year bond rate to 0.10% as a sign that it expected the cash rate to stay at 0.10% for at least three years.
Although few on the panel expect inflation to climb back to the Reserve Bank’s target range by the end of next year, most expect the bank to begin to lift its cash rate by then.
Authors: Peter Martin, Visiting Fellow, Crawford School of Public Policy, Australian National University