Reserve Bank forecasters are catching up to the princely expectations of their private sector counterparts, whose computer models tip rapid falls in the jobless rate this year and an economy whirring in high-speed mode.
Australia’s set to party like it’s 1998.
Ultra-cheap money from the central bank, healthy household balance sheets, fat profits and the tailwind of Canberra’s fiscal largesse will push the economy into overdrive.
The RBA now expects a 4.75 per cent rise in gross domestic product this year, up from its estimate of 3.5 per cent in February.
The last time we experienced such an expansion was in 1998, as the world was caught up in what former Fed chief Alan Greenspan called the “irrational exuberance” of the dotcom bubble. When that number came in a year later, a neurosis termed Y2K had taken hold as the world’s computers edged to the year 2000.
At the time, treasurer Peter Costello was talking even taller than usual, as our GDP growth hit 5 per cent through that year.
Consumer spending was off the charts as Australians bought up big ahead of The New Tax System, and its centrepiece measure of a goods and services tax. By the time the 10 per cent GST came into effect in July 2000, Australia had posted a record 13 consecutive quarters of through-the-year growth of 4 per cent or above.
That era is another country. Last year our economy contracted by 2.4 per cent so the revival has “base effects” pumping up the expected headline number.
The RBA’s forecast for GDP growth next year remains at 3.5 per cent.
In Beef Week, the unemployment forecast has been trimmed to a bullish 5 per cent by the end of this year and 4.5 per cent by December 2022, a full percentage point lower for each than expected three months ago.
Treasury’s forecasts underpinning next Tuesday’s federal budget will be a lot brighter than in the mid-year update issued in December.
Where the official family parts ways is in their judgments of how low unemployment needs to fall before the labour market is tight enough to generate robust wage rises of at least 3 per cent that feed inflation and that could lead to an upward adjustment in interest rates.
Treasury research suggests the Non-Accelerating Inflation Rate of Unemployment is between 4.5 and 5 per cent; the RBA’s estimate of NAIRU is perhaps around 4 per cent.
After Tuesday’s RBA board meeting, Philip Lowe said “highly supportive monetary conditions” would remain until we hit full employment and inflation is sustainably in the 2 to 3 per cent target range.
“For this to occur, the labour market will need to be tight enough to generate wages growth that is materially higher than it is currently,” Lowe said. “This is unlikely to be until 2024 at the earliest.”
Some bank economists are reading a language change from last month’s “does not expect” to “unlikely” as a talisman for the economy being even stronger in two years’ time, presaging an upward turn of the cash rate dial.
That’s a lot of forecasting runway in these strange, bubbly days.
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