Federal Treasury to downgrade economic growth rate

Speculation over next week’s federal budget has continued, with new reports indicating the Federal Treasury has downgraded economic growth forecasts for both the current year and 2014, by as much as a quarter of a percentage point.

The report comes as business groups are preparing for the budget, which is set to bring more business-specific spending cuts.

The Australian Financial Review reported this morning that Treasury has altered its growth forecast, lowering it by 0.25 percentage points to 2.75% for the 2012-2013 and 2013-2014 financial years.

The October Mid-Year Economic and Fiscal outlook predicted the real GDP growth for both years would be 3%.

This comes after the International Monetary Fund forecast Australia’s 2013 growth at 3% and predicted Australia would return to trend growth of 3.3% in 2014.

CommSec chief economist Craig James told SmartCompany he agrees with the original growth prediction of 3%.

“We think something in the order of 3% is reasonable. Growth of anywhere between 2.75% to 3.25% can be expected.”

He says recent indicators such as population growth and bettering foreign markets would suggest the economy is still on track to reach 3%.

“We’ve had some very good figures out of the United States on Friday night and, in the space of a day, people have changed their expectations about how the US is going. It just shows people’s perceptions can change in the twinkling of an eye,” he says.

A 2.75% growth rate would be below the economy’s long-term average of 3%, but the rate could still be influenced by April jobs data to be released on Thursday and the Reserve Bank of Australia’s interest rate decision tomorrow.

However, chief economist with AMP Capital Investors, Shane Oliver, told SmartCompany the government’s decision to downgrade the growth forecast would not be a surprise.

“Our economic growth forecasts are even lower than that and it’s funny it’s taken so long for the government to revise it down. I suppose they can say it’s just fine tuning, but it’s taken us to a range which is below trend,” he says.

AMP Capital Investors estimate the growth rate at 2.5% and Oliver says the downgraded forecast could be due to higher unemployment rates, but says it’s likely to have any impact upon business confidence.

“It probably won’t have any impact on businesses because they already know that growth is weak. This is just acknowledging that, but it could have a positive impact if it results in the RBA lowering rates tomorrow,” he says.

Oliver says the RBA should choose to lower interest rates, but may decide to wait until June.

“I’m agnostic whether it will be tomorrow or next month, but it will happen. If it was my decision I would cut tomorrow, there has been enough evidence to say that growth is still struggling in the Australian economy.”

“If you look beyond retail sales and the property market, sentiment remains tentative and growth in the construction sector and the job market it remains weak,” he says.

SmartCompany contacted the Treasury but received no response prior to publication.

Over the weekend, Federal Treasurer Wayne Swan said the “stubbornly high” Australian dollar and lower terms of trade have put even more pressure on Australian companies.

“This combination has put more acute and widespread pressure on company profits than we previously expected, and has contributed to subdued price growth across the board.”

“While the real economy has remained resilient, nominal GDP growth – which reflects the dollar value of goods and services in the economy – has been unusually weak,” he said.

 

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