State of the states

Find below Westpac’s “Coast to coast” document for September. It’s a useful note that splits much of the national data, state by state. Here’s Bill Evans overall prediction:

On 15 July we downgraded our growth forecasts for the world economy and Australia. Recent developments, globally and domestically, have reinforced our expectations that activity will be weaker than suggested by the consensus view. We are forecasting Australian GDP growth to average 1.2% for 2011, upgraded fractionally from 1.0% following the release of the June quarter national accounts, and we have left our growth forecast for 2012 unchanged at 2.5%. The RBA view stands in contrast to ours, with the Bank in their 5 August quarterly Statement on Monetary Policy forecasting growth of 2% for this year and 4½% for 2012.

We also changed our interest rate forecast to expect a total of 100bps in rate cuts over the course of the 12 months beginning in December 2011. At the time all other forecasters in the official Bloomberg Survey were forecasting rate hikes with a range of 5.0-6.5% in the RBA cash rate by September 2012 compared to our forecast of 3.75%. Over time markets and some forecasters have moved in our direction. However our views remain a considerable distance from Consensus and, more importantly, the views of the Reserve Bank.

What Bill does not mention here is that his 100 basis point cut also assumed a messy outcome from the European crisis. Despite the stock market concern for Europe, I don’t think we’ve had any outcome at all to date. So there is something of a contradiction emerging in Bill’s forecast. If there’s a European accident, involving soveraign defaults of some kind, it is very unlikely that Australia will enjoy 2.5% growth in 2012 and rate cuts will be deeper than 100 basis points. Or, there won’t be a European default, but ongoing ructions over the bailouts will keep Australian growth subdued at around 2.5%. But, in that event, there won’t, in my view, be such deep cuts in rates.

The most unlikely scenario of all is the RBA’s 4.5%. That’s must be for some other Australia.

WestpacCoasttoCoastSeptember2011[1]

Houses and Holes
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Comments

  1. I think we already have a messy outcome in Europe. Exactly what part of Europe do you consider to be without mess.

    I too don’t expect a 100 point fall, but some fall is likely, although Stevens will resist.

    The next few months will continue to be interesting.

    Cheers…

  2. > Or, there won’t be a European default,
    > but ongoing ructions over the bailouts
    > will keep Australian growth subdued at
    > around 2.5%. But, in that event, there
    > won’t, in my view, be such deep cuts in
    > rates.

    I tend to agree. Never underestimate the power of central planning. Europe will be muddling through for quite some time until electorates of some member countries lose their patients and kick out their pro EU pollies in which case their central planning will collapse taking with it their weakest economies. This will probably take a bit longer than a year and second half of 2013 when the federal election in Germany will take place may be the likely date. So next year our interest rates will be lower but not lower than 4%.