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PEFO's jobs forecasts may be wrong

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AAP

2013-08-13

One of the most disappointing aspects of the Pre-Election Economic and Fiscal Outlook on Tuesday is its bleak outlook for jobs.

Bleak, but by no means locked in.

The jobless rate is now 5.7 per cent.

But according to the forecasts in the PEFO, as it's called, it will rise to 6.25 per cent by June next year and will still be there a year later.

The number officially counted as unemployed would rise from July's 705,400 to around 780,000.

But the forecast will certainly turn out to be inaccurate.

All forecasts do.

The interesting questions are: "By how much?" and "In which direction?".

Plenty of things could go wrong, making unemployment higher than forecast.

The worst-case scenario is a slump in the global economy, sliding commodity prices and a collapse in mining investment.

Financial market chaos would stem the supply of credit, causing a housing price crash, a building industry recession and a vicious circle of even lower prices, loan defaults and job losses.

Global recession would rekindle "safe haven" demand for Australian dollars, pushing the exchange rate upward, undercutting competitiveness and crushing the economy.

It's a worst-case scenario, so let's also assume a drought depresses farm output.

And, why not, an incoming coalition government takes its anti-debt rhetoric way too seriously and clamps down on government spending when it should be doing the opposite to support growth.

Coming up with a doomsday scenario like this is as easy as pie, even without assuming, say, a resumption of the Korean War, a bird flu pandemic or another Fukushima meltdown.

But things could also turn out unexpectedly well, even though it's typically harder to imagine why.

The PEFO forecasts are based on the assumption that the Aussie dollar stays at 91 US cents.

But it would be a different story if it fell as fast in the next six months, by 3.5 per cent a month, as it has since April.

That would take it to about 73 US cents.

That's not implausible.

History shows the exchange rates swings are wildly erratic compared with the expectations of all but the most out-there forecasters.

That could happen with an improved outlook for the world economy, no steep slump in commodity prices, and the beginnings of interest rate rises in other countries taking the gloss off demand for the Aussie dollar.

A lower exchange rate would attract a tsunami of tourists from booming Asian economies, rekindle local industries and boost employment.

Rising wage income and business profits would boost tax revenues - not just personal income and company tax, but also the GST.

That would allow faster growth in government spending without blowing the budget, easing the negative effect of fiscal policy on growth and further boosting employment - a virtuous circle.

Best case, worst case, or something in between?

As for so many really big questions in economics, the only way to find the answer is to wait and see.

Garry Shilson-Josling, AAP Economist