Can the Australian economy really bounce back as quickly as Wayne Swan thinks? Economy roundup

Federal Treasurer Wayne Swan cushioned the blow of a $57.6 billion budget deficit in 2009-10 by announcing the Government has a plan to get the budget back in surplus by 2015.

 

But further inspection of this plan reveals it is based on some quite optimistic assumptions, with Treasury forecasting GDP growth can bounce back from -0.25% in 2009-10 to 2.25% in 2010-11, and 4.25% in 2011-12 and 2012-13.

 

Right now, with the global economy mired in recession, those assumptions look to be very optimistic. Not surprisingly, Australia’s economists agree.

 

David Heatherington, executive director of economics research firm Per Capita, is blunt.

 

“I am completely skeptical of long-term Treasury forecasts. At best it’s a good guess. I really don’t put much faith in predictions three to five years ahead.”

 

While there is general agreement that economic growth traditionally returns to “above trend” following a recession, there is also a general feeling that this recession is very different to the previous ones.

 

Saul Eslake, ANZ chief economist, says that the Government is correct in believing that growth will spike once the recession has eased, but is underestimating the size of that recession.

 

“The fact that Treasury is forecasting this recession to be shallower than its two predecessors, and the comparative absence of growth-spurring micro-economic reforms in prospect for the next few years, might argue against growth being as strong as Treasury has assumed,” he says.

 

CommSec senior economist Craig James is not confident that the Treasury’s figures will remain “official” for long.

 

“To begin with, it’s important to note that forecasts are just that – forecasts – they may miss their mark, and perhaps by a wide margin.”

 

Westpac senior economist Bill Evans agrees, saying major recovery will take time.

 

“We are also very confident that the profile of the global recovery will be much flatter than has historically been the case in the ‘typical’ recovery. The synchronisation of recessions; financial crises and the explosion of government debt levels are powerful indications of a protracted recovery profile,” he says.

 

“With financial markets taking time to mend and credit availability lagging demand, regional recoveries will be slow and painful. We believe that markets are currently in danger of moving well ahead of the pace of any real economic recovery.”

 

 

More budget 2009 coverage:

 

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