The Reserve Bank board will confront a cheerless outlook when it meets for the first time this year on Tuesday.
The latest Fairfax Media Scope economic survey predicts barely adequate economic growth of 2.7 per cent, growth in living standards (real net disposable income per capita) of just 1.8 per cent, and barely any real wage growth.
The surveyed economists see further slides in housing investment and Sydney home prices, a sharemarket whose price growth will struggle to keep pace with continued low inflation and an Australian dollar that will remain stubbornly high at 75 US cents.
It amounts to an argument to leave interest rates where they are, and that is exactly what the panel expects for the first half of the year, predicting an unchanged cash rate of 1.5 per cent in June. That would make the period from August 2016 to July 2018 the longest stretch of steady rates since the Reserve Bank began publishing records.
But then in the second half most of the surveyed economists predict a hike, the first rate rise forecast by the panel since 2010.
The Scope panel is made up of 26 leading economists from financial markets, academia, consultancy and industry. Over time, its average forecasts have proven to be more accurate than those of any of its individual members.
New entrants this year include Macquarie Group’s Ric Deverell and Sarah Hunter of BIS Oxford Economics, the renamed BIS Shrapnel.
Although on balance the panel expects 2.7 per cent economic growth, the forecast range is weighted to the downside. Perennial pessimist Steve Keen picks 1 per cent, Sally Auld of JP Morgan tips 2.2 per cent, Paul Dales of Capital Economics picks 2.3 per cent, and Stephen Anthony, Stephen Koukoulas and Su-Lin Ong expect 2.4 per cent.
Last year’s forecaster of the year, Bill Evans, sees growth a little higher at 2.5 per cent. The highest forecast, from Janine Dixon, Jakob Madsen and Neville Norman is just 3.1 per cent.
The chance of a recession within the next two years is 15 per cent, which sounds bad, but is an improvement on the aggregate forecast of 20 per cent mid last year.
Stephen Anthony, a former forecaster of the year, assigns a 30 per cent probability to a recession within two years.
“This current housing boom is easily the greatest in the history of our major capital cities, and history shows that the deepest recessions tend to follow real estate busts,” he writes. “The key risk to the domestic economy in 2018 and 2019 is depressed spending on the back of a property slump in eastern Australia combined with record household debt and rising borrowing costs.”
Mardi Dungey, Sarah Hunter, Stephen Koukoulas, Neville Norman, and Julie Toth assign a zero or negligible probability to a recession.
Koukoulas says what would raise the possibility is a severe and sudden slump in house prices, which would hurt the household sector and banks.
“The experience in many countries during the global financial crisis shows how a sharp fall in house prices devastates an economy,” he writes.
The other risks are global; the Chinese economy faltering and geopolitical issues from Brexit, China, the US, North Korea, Middle East or elsewhere, which can’t be sensibly assessed.
The University of Tasmania's Saul Eslake makes the point that the risk of a recession is unrelated to how long it has been since the last one .
“Suggestions that we are ‘due’ for one have no foundation.,” he says.
“Recessions are the result either of a policy mistake, or an external shock. There is no compelling reason to think that policy-makers have made, or are about to make, a mistake of the sort that could precipitate a recession.
"My estimate of a one-in-six chance of a recession reflects my assessment of the probability of an external shock, most likely emanating from policy mistakes in the United States."
The world economy is picking up.
The panel expects global growth of 3.7 per cent, a touch below the International Monetary Fund’s forecast of 3.9 per cent.
Some on the panel led by Eslake are predicting much higher growth in the US, as is the IMF, on the back of the Trump tax package. Others are sceptical. The average forecast is for unchanged US growth of 2.5 per cent.
The panel expects Chinese growth to hold up at 6.5 per cent and for the iron ore price to hold up at $US65 per tonne, down on the present $US72 per tonne, but still relatively high.
It should keep nominal GDP growth high at 4.5 per cent. Nominal growth is what matters for the budget. It is a measure of the number of dollars coming in rather than the number of tonnes sold.
But this is unlikely to translate into noticeable income growth for families. Real net disposable income per capita is expected to climb just 1.8 per cent throughout 2018, meaning growth is positive (at times it was zero or negative in 2014 and 2015) but nowhere near as high as it has been.
In the year to September 2017 it was 4.5 per cent. In the year to December 2016 it was 7 per cent.
Household spending is forecast to grow 2.2 per cent, not many points above population growth of 1.6 per cent.
The unemployment rate should close the year little changed at 5.4 per cent.
With home prices peaking (the panel expects further growth of only 2.1 per cent in Melbourne and a decline of 0.9 per cent in Sydney) investment in housing is expected to slide a further 2.2 per cent.
Mining investment is expected to slide a further 3.9 per cent, dashing hopes that the slide is about to end. Non-mining business investment, which climbed a welcome 9 per cent in the year to September, is expected to grow more slowly, by 6.4 per cent.
Wages and prices
Real wages are expected to barely grow for the fourth consecutive year, climbing by between 0.1 and 0.3 percentage points. The panel expects the wage price index to grow by 2.2 per cent while the consumer price index grows 2.1 per cent and the underlying price index climbs 1.9 per cent.
The forecast implies that much of the 1.8 per cent growth in real net disposable income per capita won’t flow through as wage growth.
The panel expects the ASX S&P 200 to close the year at 6205, an increase of just 2.3 per cent on December 2017.
It’s well down on the increase of 7 per cent in the year just past, barely more than inflation, but the upside is that our panel picked just 2.25 per cent last time and were proved wrong.
The local sharemarket has a habit of taking forecasters by surprise, being particularly susceptible to what happens on overseas markets.
The Australian dollar, at present uncomfortably high at 80 US cents, is expected to decline to 75 US cents, increasing the competitiveness of Australian industry somewhat, but not as much as many would like.
Julie Toth of the Australian Industry Group is amongst those predicting hardly any fall in dollar, picking 79 US cents. Paul Bloxham of HSBC is predicting 84 US cents and Michael Blythe of the Commonwealth Bank is predicting 83 cents.
Like the sharemarket, the dollar is at the mercy of what happens in the US, but in the other direction. If the greenback is falling against other currencies, it tends to make the Australian dollar rise.
Government infrastructure investment, not forecast in the survey, is expected to be high, and the good news for it is that government borrowing rates are expected to stay low. The panel expects a 10-year bond rate of 2.9 per cent in December, only a few points above where it is now. It hasn’t been above 3 per cent since 2014.
Peter Martin is economics editor of The Age.