Business

Forecasters tip rates steady, economy weaker than RBA expects

Australia's leading forecasters don't believe the Reserve Bank when it says the economy will grow 3 per cent this year and 3.25 per cent in 2018. The forecasts, in Friday's "Statement on Monetary Policy", are well above the median forecasts of 2.4 per cent and 2.8 per cent released by the Australian Business Economists executive committee on Tuesday.

Elected by their peers, the executive committee comprises 21 forecasters from each of the big four banks and firms such as UBS, JP Morgan, Deutsche Bank and Bank of America Merrill Lynch.

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Leading Australian economists are more pessimistic about the Australian economy than the official Treasury position. Peter Martin explains.

Their median forecast of 2.4 per cent matches exactly the average forecast of the 27 experts who took part in this month's BusinessDay Scope Survey.

"The committee expects the Australian economy in 2017 to grow at a pace that is similar to that of 2016," chairman Stephen Halmarick said in a statement. "Economic growth is expected to be moderate and driven by strength in net exports and growth in household consumption. Dwelling investment will also add modestly to growth, but business investment is expected to contract again."

None of the committee expects a recession in 2017 with the most pessimistic assigning it a probability of 25 per cent. Many quoted probabilities of less than 10 per cent. Longer term, by 2020 the committee expects GDP growth of 2.8 per cent, an unemployment rate of 5.1 per cent and a cash rate of 2.5 per cent.

On balance, the committee expects the Reserve Bank to leave the cash rate steady for an extended period. "A few committee members continue to expect the Reserve Bank to cut the cash rate further, but the committee agrees that the bank is close to the end of its easing cycle," Mr Halmarick said.

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Like the Reserve Bank, the committee expects iron ore and other commodity prices to slip from their recent highs but does not expect a return to the lows reached in 2016. Opinion was divided about the effectiveness of monetary stimulus in China and the impact of President Donald Trump in the United States. Most expect two more hikes in the Fed's federal funds rate in 2017, each of 25 points.

The executive committee will present the forecasts at the ABE annual forecasting conference at the Reserve Bank in Sydney on Wednesday morning.

Peter Martin is economics editor of The Age.

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