Economic forecast for 2011: it’s okay, but ...

News

Economic forecast for 2011: it’s okay, but ...

Recent weather-related disasters will have only a slight economic impact, the world economy in general is slowly but surely recovering, and there won’t be a second “double dip” recession in the USA. These were among the economic predictions made for 2011 by leading economist Chris Caton during his annual address to an Australian Institute of Management (AIM) seminar in Sydney on 9 February 2011

WantToReadMore

Get unlimited access to all of our content.

Recent weather-related disasters will have only a slight economic impact, the world economy in general is slowly but surely recovering, and there won’t be a second 'double dip' recession in the USA. These were among the economic predictions made for 2011 by leading economist Chris Caton during his annual address to an Australian Institute of Management (AIM) seminar in Sydney on 9 February 2011. Caton is the Chief Economist of the BT Financial Group.
 
Impact of floods and cyclones
 
Although acknowledging the substantial human costs and losses of these recent events, Caton suggested that their ongoing economic impact has been exaggerated. This is typically the case: for example dire economic predictions were made after Hurricane Katrina (New Orleans, USA) in 2005 and the terrorist attacks on New York in 2001, but their economic impact proved to be minor.
 
There will be a short-term impact on coal exports (which mostly come from Queensland) and on one quarter’s inflation rate, but Gross Domestic Product (GDP) will increase later when rebuilding occurs and capital is replenished. Both the weather events and the tax levy to partially fund rebuilding (if enacted) are likely to prevent or delay at least one rise in interest rates, plus there may be a slight impact on the retail sector, which is already considered 'soft' at present.
 
Once the short-term effects mitigate, GDP will increase faster and interest rate rises will resume.
 
As in past years, Caton criticised the 'debt fetish' of some politicians and commentators, stating again that Australia has a very low deficit by world standards.
 
How overseas developments are affecting Australia
 
Although Australia is less affected by US economic developments than it used to be (China now has greater influence on trends), it is still relevant to analyse what happens there. Fears of a 'double dip' recession now appear unfounded. Partly this is because many economic indicators fell so far (such as new housing starts) and have stayed low that it is very unlikely that they will fall further. But it is also because some indicators have sharply improved — for example, unemployment has fallen by 0.8% in only two months.
 
Most major countries performed better economically in 2010 than what had been forecast for them, but most of those forecasts were pessimistic. Conversely, Australia was one of the few to perform slightly below forecasts, but those forecasts were comparatively optimistic. In terms of GDP growth forecast over the next 10 years, predictions for Australia are still at or near the top of the list.
 
Caton described the large debts in European countries such as Greece as 'not a game-changer', except perhaps for those individual countries. Similarly, any attempts to slow the growth rate of the Chinese economy (such as interest rate rises) will have little effect on Australia. China’s recent growth patterns have been very similar to those of Japan during the 1960s, albeit with a much bigger population. This suggests that the growth phase in China might be very lengthy, although not permanent.
 
Other economic issues in Australia
 
Other significant comments and predictions made by Caton included the following:
  • The labour market has performed very well, with unemployment falling below 5% versus predictions of 6–7% a couple of years ago. This is a partial contributor to recent interest rate rises. But an increasing workforce combined with an 'OK' GDP results means that productivity performance is 'fairly unimpressive', as commented on in a recent report from the Grattan Institute. 
  • The inflationary impact of remuneration increases in a tight labour market has tended to be exaggerated. This view is supported by the recent substantial fall in the unemployment rate.
  • House prices are generally over-valued at present, suggesting a 'flat' market in the near future. However, the large price rises have mainly been confined to capital cities, not to regional areas.
  • The exchange rate is also over-valued at present. Caton predicted it would drop to the low-90 cents range (versus US dollar) this year, because commodity prices will fall.
  • Conversely, the Australian share market is undervalued at present, so now is a good time to buy shares. However, the share market in general has become less volatile in recent times, with small differences between highest and lowest closing rates.
  • Historically, the US share market always increases during the third year of a President’s four-year term (which will be 2011 for Obama). This is because governments take action to stimulate the economy in time for the following year’s election.
  • The 'two-speed economy' in Australia tends to be an exaggerated claim. Unemployment levels are a fairly reliable indicator of the economic performance of different States, and these rates are currently closer together than usual. There are differences, but they are not substantial.
  • There is a shortfall in infrastructure expenditure equivalent to about four years’ worth of spending. This is likely to remain because State and federal governments are generally scared of being in debt (wrongly so according to Caton — see above).
Further information
 
Further information about this seminar is available from AIM.
Post details