As Crikey noted in our budget night edition, the budget forecast for this financial year isn’t exactly optimistic: while growth is forecast for a plausible-looking 2.75% next year, it says this financial year will come out at 1.75%. That’s a downward revision from the 2% forecast in December in MYEFO. What gives? The December 2015-December 2016 GDP growth was 2.4%, so it seems Treasury expects a significant slowing is happening right now.
A leading economist has now backed that. The AMP’s chief economist Dr Shane Oliver warned in a note this morning that weak retail sales, falling dwelling investment and weak wages had again raised the chances of a fall in GDP to be reported in the March quarter national accounts to be released in early June. He is the first leading economist to suggest that a fall in GDP is possible.
Economic data this week was a mixed bag. There was a strong reading for business confidence in the NAB’s monthly report (business conditions jumped to a decade high) and ANZ job ads, but retail sales and building approvals were weak. “The peak in building approvals is now well behind us,” Oliver said, “and this will show in slowing growth in dwelling construction activity this year and a contraction next year.”
That is, the slowdown is already happening but is going to get worse into 2017-18 — when the government expects growth to pick up significantly compared to now.
“More immediately,” Oliver said, “the weakness in March quarter real retail sales (up just 0.1% quarter on quarter), coming on the back of the previous week’s data showing that net exports will likely detract from growth again in the March quarter, points to the risk of a very weak and maybe even negative March quarter GDP outcome.”
Cue gulps within the government.
We had a negative quarter in September 2016 — and a big one, 0.5% — but we got through it fine, despite some fools using the “r” word. Indeed, we produced a ripper of a December quarter, with growth of 1.1%. But another one so soon might have more significant impacts on consumer and business sentiment.
So Oliver sees “downside risks to the Government’s growth (and wages) assumptions. More importantly with the Budget providing no net stimulus to the economy (in fact it’s a detraction) it still falls to the RBA to do the heavy lifting on the economy and on this front soft recent data and the implications for inflation make it clear that another rate cut in Australia is far more likely than a rate hike this year.”
Big call, but Oliver is correct about stimulus — despite the big tax-and-spend nature of the budget and our ever-increasing debt level and the infrastructure focus, the budget deficit next year is forecast to fall from around $38 billion to around $30 billion, so the government will be pumping less money into the economy.
Oliver says we need a lower dollar to help our major exports, tourism and education — and he thinks that will eventuate later in the year, with the Aussie falling below 70 cents.
Other economists continue to question one of the main budget forecasts — a bump in wages growth over the next two years from its current, miserable 2% to 2.5% and then 3%. We will know next week how much chance the 2016-17 forecast has of being met when the Bureau of Statistics releases the Wage Price Index for the March quarter. But on current form, that talk from The Australian Financial Review of Morrison being in a position to announce tax cuts before the next election looks decidedly optimistic.
Even if Oliver’s suggestion of a negative result doesn’t come to pass, economic growth will still be much weaker than the December quarter. Treasury has worked that out. The question is whether the weakness extends into the current quarter and then into 2017-18. Finger crossed, both for Scott Morrison and for the rest of us, that it doesn’t.