No recession, no quick turnaround

BIS Shrapnel's Long Term Forecasts 2009 - 2024 report says the Australian economy's most difficult phase will occur over the next year.

Despite recent encouraging reports on employment, consumer spending and house prices, Australian industry should brace itself for a run of bad economic news in coming months, according to economic forecaster and industry analyst BIS Shrapnel.

BIS Shrapnel’s Long Term Forecasts 2009 – 2024 report says the Australian economy’s most difficult phase will occur over the next year.

The company is forecasting a substantial 17 % decline in business investment, falling household incomes and weak consumer spending, which will result in a fall in employment.

However, BIS Shrapnel does not expect a recession this financial year.

Gross Domestic Product (GDP) growth is forecast to be 0.1 per cent in calendar year 2009 and 0.5 per cent in 2009/10. Indeed, BIS Shrapnel has been one of the few forecasters over the past six months to consistently predict that a contraction in annual GDP would not occur.

“Positive net exports, a turnaround in the stock cycle, housing construction and government spending will combine to prevent a contraction in the economy,” says BIS Shrapnel report author and senior economist, Richard Robinson. “However I would not rule out another negative quarter of growth occurring at some stage.”

Domestic downturn spurred by collapsing investment

The Australian economy has managed to successfully navigate the worst global financial crisis since the Great Depression, and the deepest world recession since World War II, with minimal damage to its financial system and only a relatively modest setback to output and employment.

“The credit squeeze has expedited and exacerbated a downturn in business investment,” says Robinson. “This is expected to increase unemployment during 2009/10, with the unemployment rate to peak between 7.5 and eight per cent during 2010.”

The Federal Government’s stimulus program, along with a recovery in dwelling construction, which has been helped along by the First Home Buyer Boost Scheme, will help dampen the extent of the downturn in demand. However, BIS Shrapnel is forecasting a 7.7 per cent decline in total investment (public and private), which will be a major drag on growth throughout 2009/10.

“Household incomes and spending were bolstered by a combination of deep interest rate cuts, stimulus payments and pre-legislated tax cuts through 2008/09,” says Robinson.

“Together with a resilient labour market and a second quarter improvement in world financial markets, the measures by the Reserve Bank of Australia and the Federal Government successfully averted a crisis of confidence and helped lift consumer confidence back into positive territory entering 2009/10.”

As income growth slows, and rising unemployment weighs down confidence, consumer spending is expected to moderate over the second half of 2009 and only grow weakly through the first half of 2010. However, says BIS Shrapnel, growth should remain positive, which will dampen the second round effects of rising unemployment.

While overseas economic and financial conditions are expected to steadily improve through 2009/10, the ongoing downturn in business investment, and the fact that there will be considerable underemployment of existing resources, will preclude a recovery in employment before 2010/11.

Employment growth is not expected to exceed two per cent before 2011/12.

Rebound in 2011, led by housing

Beyond 2010 BIS Shrapnel is forecasting a solid recovery, led by housing construction.

Economic growth will strengthen over 2011/12 as consumer demand recovers, and subsequently, business investment and employment regain momentum.

“A lack of synchronisation in Australia’s investment cycles had proved fortuitous for the economy, allowing the investment boom to run uninterrupted for eight years,” says Robinson.

“And now housing construction, which has been constrained by a lack of affordability since the cycle turned down in 2003/04, is poised for a strong upswing once economic conditions have sufficiently stabilised.”

BIS Shrapnel says strong pent-up demand in combination with low interest rates, high rents and high rental yields is set to drive a strong phase of construction from 2010/11, which will strengthen over 2011/12 and 2012/13.

However, business investment is only expected to begin to regain momentum from 2011/12 after experiencing a deep downturn over 2009/10 and 2010/11.

The release of pent up demand for investment and consumer spending will temporality drive GDP back up to four per cent in 2011/12.

“The rise in unemployment, the downturn in demand and the increase in productive capacity, following an eight year business investment boom, will cause considerable economic slack,” says Robinson.

“We will then experience a temporary run of strong productivity growth as the slack is absorbed, reducing the threat from domestically-sourced inflationary pressures.”

However, the persistence of high household debt levels means that households will remain highly sensitive to interest rates and employment growth, says BIS Shrapnel.

The downturn in demand and employment, together with recent investment in productive capacity, has relieved the economy’s capacity constraints, but the economy is still expected to experience truncated cycles in the medium term, interrupted by debt-induced downturns in consumer spending and dwelling construction.

With the government committed to returning the budget to surplus by the middle of next decade, there will be no tax cuts or cash injections to boost disposable incomes and household spending over the medium term.

Along with only moderate growth in overseas economies, this means the Australian economy will struggle to achieve growth much over three per cent in the medium term.

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