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21/02/2018
Author of the economic overview, Commonwealth Bank of Australia Chief Economist and Managing Director, Economics, Michael Blythe presented his economic forecast for the year ahead.
He noted the economy is well placed at the start of 2018 with the country having celebrated its 26th consecutive year of economic growth in 2017.
“A lot of the key growth components for the rest of the world and indeed Australia are falling into place,” Mr Blythe said.
“There are some risks but overall it looks a pretty positive story.”
He highlighted business capital expenditure and the rising backlog of work and lengthening delivery times as classic indications of capacity constraints emerging. If this is not offset by a lift in capital spending, there is a risk that we won’t get the full benefits of the positive global backdrop and positive domestic drivers coming through.
He said the other big risk coming through is very high levels of household debt at a time when income growth has been exceptionally weak. Household debt is now the highest ever seen. At the same time wages growth is the lowest seen in the history of the available data.
“That combination of high levels of household debt and weak income growth is accompanied by a lot of job security fears and a perception that household budgets are under pressure,” he said.
“So, what you have is a fairly toxic mix when you’re thinking about the consumer side of the story and it’s one that’s been in place not just for the last few weeks but the last few years and the risk is I think changing the way that consumers behave.
“What it’s doing is making them less responsive to the good economic news and potentially more reactive to any kind of negative shock that may come along. Certainly, the interplay of these forces is one of the big risks to think about in the year ahead.”
Mr Blythe was joined at the event by Federal Shadow Minister for Finance, the Hon. Dr Jim Chalmers, Lateral Economics Founder and CEO Dr Nicholas Gruen and fellow EPO contributing author McKinsey & Company Partner, Dr Tim Fountaine.
He said while the discussion about wages is becoming ideological, regardless of political persuasion, “we should all be worried about those stagnant wages figures that we’re seeing”.
“We’ve got aggregate income growing, it’s flowing into company profits, it’s flowing into government revenue as Michael (Blythe) also pointed out but that same trend isn’t necessarily happening with households,” Dr Chalmers said.
According to Dr Chalmers, although the global economy shows signs of “being in the best nick it’s been in for some years” there is a disconnect between that global growth and the economy people in Australia are experiencing, particularly through their incomes. And that weak wages growth has macroeconomic consequences for Australia.
“We’ve got wages growth which is only just barely keeping up with inflation. It means households have a greater focus on containment. They’re deferring spending and putting more emphasis on trying to pay off that record high household debt,” he said.
“That really is a good starting point for considering why people are unhappy in the community, why they’re considering political alternatives, not just oppositions but scary alternatives as well. (It’s) because there is a sense in the community that the link between hard work and reward, if it hasn’t been severed it’s at least been frayed.
“People feel like the rules of the economy are written to benefit somebody else at their expense.”
Dr Chalmers, who described himself as a “huge supporter of four-year terms federally, noted the EPO chapter exploring the option of four-year parliamentary terms “is a good reminder for supporters of four-year terms that we’ve got a hell of a lot of work to do to convince people that giving us a longer period of time in office actually leads to better political decisions.”
Using some of recent history’s famous fails in economic and military forecasting to illustrate his critique of forecasting, Dr Gruen urged a move towards probabilistic or Superforecasting.
Part of the problem with forecasting, he said, is the perceived need to be entertaining.
“Being entertaining is something we privilege more, I won’t say than being right because to forecast you’ve got to be comfortable with being wrong, but we don’t really pay a lot of respect to how forecasts are being made,” he said.
“We’re not showing any curiosity about trying to sift through why forecasts are wrong.
“A forecast is a good forecast if we can make it and then, over a period of time measure the accuracy of the forecast. You have to allow it to be wrong.
“Then we’re starting to extract information from people who are making forecasts and we can make that the basis on which we start to discriminate between a good forecaster and a less good forecaster.”
Superforecasting, he said, tries to systematise things. Superforecasters are open minded, careful, curious and, above all, self-critical. They also seek constant objective feedback on the reality of how the world is developing and on others seeking to forecast the same thing.
“I think a more important forecast, which we don’t get and is difficult to produce, is ‘what are the chances of a recession?’ What are the chances of a spike in interest rates?’ and so on.”
He urged people to not pay more attention to forecasts than the value they add and called upon governments to release their forecasting models and use them like open source software.
A simple way to see this impact, he said, is to compare the top companies in the US and Australia from 20 years ago and today.
In the US, they have almost all changed. In Australia, on the other hand, our top companies – miners and the big four banks – are the same as they were in 1997.
“(In the US) we used to have GE and Coca-Cola and oil and now five companies who until a few years ago were very small,” Dr Fountaine said.
“One of the interesting things about them is that their business models are either pretty much exclusively or to a very large extent reliant on data and analytics.”
He noted, for example that the biggest asset Amazon has is the data they have on everybody and what their next purchase might be.
“In Australia we haven’t had the same level of disruption at least at the top end of our economy,” he said.
Dr Fountaine said analytics can lead to automation which has a big impact on people’s jobs. Up to 45 per cent of work tasks could potentially be automated.
“If you’re in telecoms, media or professional services, or banks, financial services, you better have an analytics plan because your competitors do and so you’re in an arms race around this stuff. The rest of the economy though is hardly starting,” he said.
However, he stressed, computers and humans are good at different things and this would lead to people moving into fields that require creativity, empathy, interpersonal skills and innovation.
“For all of us it will mean we just have to get better at working alongside computers to help us with the decisions that they’re better at,” he said.
“I think we’re at the start of a really exciting new age where data and analytics are going to be a huge part of our lives and a big part of the economy.
“You can see wealth moving towards people who have data and people who know how to make use of it. Australia is just starting out. It’s really patchy. There are parts of the economy that are embracing and others that are slow to move.
“It presents opportunities for us I think… I look forward to a robust and thoughtful public debate on how we’re going to handle it.”
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He noted the economy is well placed at the start of 2018 with the country having celebrated its 26th consecutive year of economic growth in 2017.
“A lot of the key growth components for the rest of the world and indeed Australia are falling into place,” Mr Blythe said.
“There are some risks but overall it looks a pretty positive story.”
He highlighted business capital expenditure and the rising backlog of work and lengthening delivery times as classic indications of capacity constraints emerging. If this is not offset by a lift in capital spending, there is a risk that we won’t get the full benefits of the positive global backdrop and positive domestic drivers coming through.
He said the other big risk coming through is very high levels of household debt at a time when income growth has been exceptionally weak. Household debt is now the highest ever seen. At the same time wages growth is the lowest seen in the history of the available data.
“That combination of high levels of household debt and weak income growth is accompanied by a lot of job security fears and a perception that household budgets are under pressure,” he said.
“So, what you have is a fairly toxic mix when you’re thinking about the consumer side of the story and it’s one that’s been in place not just for the last few weeks but the last few years and the risk is I think changing the way that consumers behave.
“What it’s doing is making them less responsive to the good economic news and potentially more reactive to any kind of negative shock that may come along. Certainly, the interplay of these forces is one of the big risks to think about in the year ahead.”
Mr Blythe was joined at the event by Federal Shadow Minister for Finance, the Hon. Dr Jim Chalmers, Lateral Economics Founder and CEO Dr Nicholas Gruen and fellow EPO contributing author McKinsey & Company Partner, Dr Tim Fountaine.
Worry over slow wages growth
In his address, Dr Chalmers named weak wages growth as the most important intersection in the Australian economy and the political contest.He said while the discussion about wages is becoming ideological, regardless of political persuasion, “we should all be worried about those stagnant wages figures that we’re seeing”.
“We’ve got aggregate income growing, it’s flowing into company profits, it’s flowing into government revenue as Michael (Blythe) also pointed out but that same trend isn’t necessarily happening with households,” Dr Chalmers said.
According to Dr Chalmers, although the global economy shows signs of “being in the best nick it’s been in for some years” there is a disconnect between that global growth and the economy people in Australia are experiencing, particularly through their incomes. And that weak wages growth has macroeconomic consequences for Australia.
“We’ve got wages growth which is only just barely keeping up with inflation. It means households have a greater focus on containment. They’re deferring spending and putting more emphasis on trying to pay off that record high household debt,” he said.
“That really is a good starting point for considering why people are unhappy in the community, why they’re considering political alternatives, not just oppositions but scary alternatives as well. (It’s) because there is a sense in the community that the link between hard work and reward, if it hasn’t been severed it’s at least been frayed.
“People feel like the rules of the economy are written to benefit somebody else at their expense.”
Dr Chalmers, who described himself as a “huge supporter of four-year terms federally, noted the EPO chapter exploring the option of four-year parliamentary terms “is a good reminder for supporters of four-year terms that we’ve got a hell of a lot of work to do to convince people that giving us a longer period of time in office actually leads to better political decisions.”
Forecasting the future: Doing it better
While Michael Blythe emphasised in his presentation that the previous year’s economic forecasts had been largely correct, this is not always the case.Using some of recent history’s famous fails in economic and military forecasting to illustrate his critique of forecasting, Dr Gruen urged a move towards probabilistic or Superforecasting.
Part of the problem with forecasting, he said, is the perceived need to be entertaining.
“Being entertaining is something we privilege more, I won’t say than being right because to forecast you’ve got to be comfortable with being wrong, but we don’t really pay a lot of respect to how forecasts are being made,” he said.
“We’re not showing any curiosity about trying to sift through why forecasts are wrong.
“A forecast is a good forecast if we can make it and then, over a period of time measure the accuracy of the forecast. You have to allow it to be wrong.
“Then we’re starting to extract information from people who are making forecasts and we can make that the basis on which we start to discriminate between a good forecaster and a less good forecaster.”
Superforecasting, he said, tries to systematise things. Superforecasters are open minded, careful, curious and, above all, self-critical. They also seek constant objective feedback on the reality of how the world is developing and on others seeking to forecast the same thing.
“I think a more important forecast, which we don’t get and is difficult to produce, is ‘what are the chances of a recession?’ What are the chances of a spike in interest rates?’ and so on.”
He urged people to not pay more attention to forecasts than the value they add and called upon governments to release their forecasting models and use them like open source software.
Analytics and data transforming the economy
Dr Fountaine outlined the profound impact that data and analytics are having on the economy.A simple way to see this impact, he said, is to compare the top companies in the US and Australia from 20 years ago and today.
In the US, they have almost all changed. In Australia, on the other hand, our top companies – miners and the big four banks – are the same as they were in 1997.
“(In the US) we used to have GE and Coca-Cola and oil and now five companies who until a few years ago were very small,” Dr Fountaine said.
“One of the interesting things about them is that their business models are either pretty much exclusively or to a very large extent reliant on data and analytics.”
He noted, for example that the biggest asset Amazon has is the data they have on everybody and what their next purchase might be.
“In Australia we haven’t had the same level of disruption at least at the top end of our economy,” he said.
Dr Fountaine said analytics can lead to automation which has a big impact on people’s jobs. Up to 45 per cent of work tasks could potentially be automated.
“If you’re in telecoms, media or professional services, or banks, financial services, you better have an analytics plan because your competitors do and so you’re in an arms race around this stuff. The rest of the economy though is hardly starting,” he said.
However, he stressed, computers and humans are good at different things and this would lead to people moving into fields that require creativity, empathy, interpersonal skills and innovation.
“For all of us it will mean we just have to get better at working alongside computers to help us with the decisions that they’re better at,” he said.
“I think we’re at the start of a really exciting new age where data and analytics are going to be a huge part of our lives and a big part of the economy.
“You can see wealth moving towards people who have data and people who know how to make use of it. Australia is just starting out. It’s really patchy. There are parts of the economy that are embracing and others that are slow to move.
“It presents opportunities for us I think… I look forward to a robust and thoughtful public debate on how we’re going to handle it.”
View all videos from this event