Will Treasury napalm the green shoots?

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David Uren today captures the premature jobs celebration that has taken hold of the nation’s more flighty analysts:

STRONG jobs growth has raised hopes that unemployment has passed its peak and puts pressure on Treasury to revise up pessimistic growth assumptions behind next month’s budget.

…the strength…bodes well for the nation and suggests that the coming fall in resource investment could be managed without significant disruption.

“The handover from the ­resource sector to the rest of the economy is happening and that will bring a regional switch in where the growth is,” Barclays chief economist Kieran Davies said.

“This late in the piece Treasury is probably going to stick to a fairly conservative set of numbers,” he said, though he suggested this year’s budget deficit was likely to be significantly lower than the $47 billion forecast in the mid-year budget update.

The labour market performance is also better than anticipated by the Reserve Bank which, like Treasury, has been expecting unemployment to rise above 6 per cent. The Reserve Bank thought it would peak early next year, while Treasury expected unemployment to average 6.25 per cent through to June next year.

AMP chief economist Shane Oliver said while the labour market may not be quite as strong as suggested by the latest official surveys, it was in a better state than implied by headlines about lay-offs and business closures.

The jobs market is not better than Treasury, or the RBA forecast. The trend number, the one that matters, is 6.1%. Our David, who is generally much better than this article suggests, knows this.

Budget forecasts for next year should not be raised. They are not pessimistic. They are realistic. I expect a muted jobs recovery to continue for few more months. Retail has had a good run on pent-up demand post election and dwelling construction is running into a good patch.

But stabilisation is very different to acceleration. The prospects are dim that this cycle can lift into a virtuous cycle of rising asset prices, consumption, investment, jobs, and more rising asset prices. Income and employment can’t accelerate owing to a number of headwinds.

The budget has forecast a 2% drop in capex for next year and the last ABS survey indicated 17%. The terms of trade are around forecast after the iron ore bounce but it’s cyclical and won’t last and the clear risk is that terms of trade falls move ahead of forecast again. The dollar is already 4% above budget projections and we have not even reached the jobs-intensive component of the capex cliff. Yet house prices have shot to levels where the drover’s dog knows the bubble is back and confidence for both consumers and business is falling below long run averages as bullhawks bellow.

To raise budget forecasts now will mean the government has to intensify its austerity agenda, just as we head off the employment-intensive dimension of the capex cliff. That risks saddling it with higher cuts into a weaker economy than expected. If so, it will be repeating the mistake of Wayne Swan and the RBA and running a very serious risk of naplalming what green shoots there are.

This premature jobs celebration should be ignored by Treasury.

About the author
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal. He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.