Monday, 19 August 2013

Three different views of the Australian outlook

Last week, as part of some regular work I do for a consulting client, I went fossicking around the economic forecasts of the major Aussie banks. Or three of them, at any rate: the ANZ makes its forecasts available only to its own customers (you have to register, and give a contact name at the ANZ, to see them). It's one way of playing things: if the stuff is seen as valuable or exclusive, then it could swing business ANZ's way. Does it work as well as being seen as more accessible and informative would? Who knows. In any event, here are the forecasts of the other big banks.

What's interesting here is that, although the numbers at first blush don't look that different, you've actually got three qualitatively different views of the outlook for the Aussie economy.

As background, the latest 'official' view of the outlook (as seen in both the Aussie Treasury's Pre-election Economic and Financial Outlook, and in the Reserve Bank of Australia's latest Monetary Policy Statement) is for a somewhat sub-par year for the Aussie economy this year, with GDP growth of 2.5%, picking up to a more normal 3% rate of growth in 2014 (the RBA has a range of 2.5-3.5%).
None of the major banks quite buys this story, however.

For the Commonwealth economists, it's a case of "Slowdown? What slowdown?" They have the economy growing at close-to-trend pace throughout, unemployment holding at current levels, and inflation potentially becoming an issue by late next year.  in the table I haven't shown the three banks' views of likely monetary policy, but they are fully consistent with their macro view: in the Commonwealth's case, they see no change in monetary policy in coming months, as (on their read of the economy) there's no need for one.

For the Westpac team, it's "Pickup? What pickup?" They have growth slowing this year, and slowing even more next year, unemployment consequently rising, and inflation not an issue. They think the Reserve Bank will have to make two more 0.25% cuts in the cash rate to support a weak economy.

The NAB folks are harder to describe in a nutshell. They have a slowdown, and they have a pickup. But the slowdown is quite pronounced, and the pickup isn't up to much, either, so they too have unemployment rising, and inflation no biggie. They're picking one cut in the cash rate from the RBA.
They're all nice,consistent and plausible scenarios, and they got me thinking a few things.
One, obviously enough, is which one looked most likely? I'm leaning at the moment towards the NAB view: the latest business opinion surveys are on the saggy side, which suggests a weak 2013 outcome, but there are good reasons to expect at least modestly  better things next year (a lower A$, the lagged effect of easier monetary  policy).

The other thought I had was: I wonder to what extent each of these banks is using their in-house views to guide their business strategy? When I was a bank economist - with the BNZ, in the '80s and '90s, both before and after its acquisition by NAB - the economists' read of the outlook was quite well integrated with the bank's business plans. These days, I appreciate that banks have less leeway, and probably less inclination, to take big positions in the marketplace on the strength of a house view of the likely outlook, than they used to pre-GFC. But I'd like to think senior management at the three banks are still paying some attention to these numbers.

After all, there's a fair bit of difference between an Aussie economy that has around 5½% unemployment and one with around 6½% unemployment. In the one, you'd be more minded to go for market share, in the other you'd be more focussed on risk management. You'd also have quite different views on the direction of interest rates. In sum, the economics team that gets it right, and gets listened to, has considerable potential, at this point in the Aussie cycle, to add quite a bit of value to its bank's outcomes.

And conversely, of course.

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