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Lower growth, less revenue
Leading Australian economists are more pessimistic about the Australian economy than the official Treasury position. Peter Martin explains.
But the BusinessDay Scope survey of 27 leading economists from industry, consultancy, academia and finance has a rather circumspect view on where the ASX200 will end up by the end of 2017. The average forecast index growth is 2 per cent, with economists on average expecting the index to finish a smidgen off 5800. It finished at 5671 on December 31, 2016.
If we go on past forecasting successes in the Scope survey, which stretches back 40 years, the average can be argued to understate the downside risks.
Two of the most accurate economists in previous years – Industry Super's Stephen Anthony and Kingston University, London's Steve Keen, both of whom have three times been crowned BusinessDay's forecaster of the year – expect the sharemarket to fall, markedly, over the year.
Keen's prediction is for the market to shed 12 per cent to 5000. Anthony, meanwhile, is slightly more hopeful: he expects the index to lose just 10 per cent to 5100.
Both are far more bearish than their peers. All others expect a small gain for the year, ranging from 1 to 9 per cent. Remove Keen and Anthony from the picture and the average jumps up over 200 points to 5893, a 4 (rather than 2) per cent gain on 2016's final index position.
To back their stance Keen and Anthony both cite a long-term, underlying impression that asset prices must give.
![Industry Super Australia chief economist Stephen Anthony is less than optimistic about the sharemarket.](/web/20170206152544im_/http://www.smh.com.au/content/dam/images/g/s/q/m/h/c/image.related.articleLeadwide.620x349.gu3eoe.png/1486158970908.jpg)
Keen cites the current Australian economy as being primarily credit-driven. He expects credit will dry up in 2017, sucking demand out of the economy. This will especially affect the ASX, as "it will reduce the valuations of the banks, which form a large part of the index."
Underlying economic weakness is also behind Anthony's economic pessimism. The former Treasury modeller has for years relied on "Barry", a macroeconomic model of the Australian economy that relies on more than 50 factors to extrapolate where the economy will go. Assuming no policy changes, he says the share market will fall because the real economy is weak.
He also has concerns that somewhat dovetail with Keen's.
"Once a year, Deutsche Bank releases a publication called Long Terms," Anthony said. "It's an index of 15 advanced economy asset prices – equities, bonds and properties and the like – for the last 200 years. Their indicator is at an all-time high. What that says to me is there's an adjustment coming.
"Asset prices are fundamentally misaligned."
The University of Tasmania's Mardi Dungey, an economics and finance professor, is, on the other hand, the most bullish economist in the BusinessDay survey (though she isn't as much of an outlier as Anthony and Keen). Two factors underlie her prediction of a 9 per cent ASX200 gain: a belief that Chinese commodity demand will persist, and that demand for equities will rise as the housing boom slows down and (she hopes) policy makers take steps to reduce the level of over-investment in housing.
"Both sides are fairly positive … despite the fact that there is a general glumness about where the economy is at," she said.
Looking at things historically, Dungey said we perhaps overestimate the level of economic weakness we are currently experiencing. "If you look at the major features objectively – unemployment, inflation, GDP growth – for much of our economic history this isn't a bad outcome. It's hard to see where the glumness comes from – apart from a contagion from global effects."