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Panpa Bulletin : April 2006
april 2006 PaNPa bUlletiN | 9 at the Australian Industry Group's Economy 2006 conference, a warning bell was sounded about being too optimistic about the eco- nomic conditions for 2006. "Optimism for 2006 is over- done," said Jim Walker, chief economist for Credit Lyonnais Securities Asia. Saul Eslake, chief economist for ANZ, said the economy is near the point in the cycle where the seeds of previous recessions have been sown. "In some im- portant respects the Australian economy is at a similar stage to where it was in 1960, 1973, 1981 and 1989 -- just before each of the past 4 recessions," Eslake said. He pointed to three policy mistakes traditionally made at this stage of the business cy- cle, but believes recent events have made Australia less prone to two of the mistakes. The first is to allow wages to grow faster than justified by productivity in a tight labour market, however he believes this is less of a risk now that centralized wage fixa- tion is almost dead. Secondly, Australia has at this crucial point in time failed to allow the Reserve Bank to raise interest rates before inflation begins to accelerate. However, Eslake believes this is no longer a serious risk, due to the inde- pendence of the RBA. The de- cision Eslake believes we are still at risk of making is giving away too much of the revenue dividend in spending increases and tax cuts. Eslake displayed figures that showed that while over the last 3 budget cycles (ie including the first half of the 2006-07 budget cycle), 'param- eter variations' (mainly upward revisions to revenue estimates) have improved the underlying budget position by a total of $97.5bn over six years, 'policy decisions' (new spending and tax cuts) have taken $98.8bn off what would otherwise have been the budget surplus over that period. Tony Pensabene, the asso- ciate director -- economic and research, at the Australian In- dustry Group, broke the infor- mation down to look at states and industry sectors. The growth states in 2005 were Western Aus- tralia, Queensland, Northern Territory and Tasmania. While WA and NT grew on the back of mining, Tasmania's success was on the back of manufacturing, while Queensland had a fairly even mix between the two. Overall, manufacturing in Australia had a bad year in 2005, a marked contrast to the huge growth seen in countries such as Ireland, Spain, Hong Kong, Germany, US, Japan and Swit- zerland. Manufacturing is set to recover in 2006, but the outlook is dependent on the growth in domestic demand (modest upturn expected), strength of housing activity (worst appears to be over), level of the Austral- ian dollar (forecast to move close to US 0.70), the impact of China (further import penetration, continued pressure on margins, offshoring will continue, likely to accelerate restructure) and impact of higher fuel costs (out- look uncertain). 2006 is expected to see mod- est sales growth, but volume growth likely to be weak. Export growth markets expected to be New Zealand, United States, China, Singapore, United King- dom. Sales are predicted to be up for basic metal products, tex- tiles and machinery and equip- ment. The paper, printing and publishing sector expected to do slightly less well than 2005 but still in the top three. Cloth- ing and footwear will see a sub- stantial fall, as will food and beverage and chemicals, petro- leum and coal. Construction materials and transport equip- ment expected to go backwards in 2006. This year, businesses are expecting to focus on cutting non-labour costs and reducing staff this year. There will be less emphasis on domestic market growth, developing new prod- ucts, increasing investment and growing exports. However, nearly all sectors are expecting new products to increase the percentage of sales this year, chemicals petroleum and coal and miscellaneous manufac- turing the only two expecting less from new products. The outlook is expected to improve for services, although it will be patchy for retail related activities. Commercial con- struction is expected to remain strong, along with Government spending on public infrastruc- ture. Publishing will be slower than 2005, but still in the top three economy 2006 the verdict Points that Walker said indicate a need for caution in the current climate included: > there are expectations that the uS will grow by 3.5 percent in 2006 but all of the above trend growth will come in the frst half. In 2007 the expectation is for recessionary growth of just 1.3 percent > the uS federal reserve is faced with a dilemma: the yield curve is pointing to a 2007 slow down but current indicators, including infation, suggest more rate rises are needed > uS federal reserve funds rate will hit fve percent in the next three months. Bernanke premium may take it to 5.5 percent by the end of September > Monetary conditions have already sown the seeds of a downturn. Dollar strength in 2005 will take its toll in european and Japanese demand in 2006 > In dollar-denominated GDP terms, the eu and Japanese economies are now much smaller than they were at the beginning of 2005 > asian export growth began to show signs of fatigue as early as the third quarter of 2005 > exports from India, Indonesia, Japan, Korea, Philippines, thailand and taiwan have all rolled over already he pointed to three policy mistakes traditionally made at this stage of the business cycle, but believes recent events have made australia less prone