Leading economic forecaster and industry analyst, BIS Shrapnel , said that despite recent encouraging reports regarding employment, consumer spending and house prices, Australian households should brace themselves for a run of bad economic news in coming months.
BIS Shrapnel’s Long Term Forecasts, 2009 – 2024 report says the most difficult phase in the Australian economy will occur over the next year. BIS Shrapnel is forecasting a substantial 17 per cent 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.
Domestic downturn driven 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 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.
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.
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 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.
