Australia lowers outlook as focus shifts from mining

Central bank forecasts GDP to rise 2.25 per cent amid search for new economic growth drivers

PUBLISHED : Saturday, 10 August, 2013, 12:00am
UPDATED : Saturday, 10 August, 2013, 4:31am

The Reserve Bank of Australia lowered its growth outlook as the economy transitions from mining investment, a process that may be aided by the Australian dollar falling further from its still "high level".

"The forecast for Australian [gross domestic product] continues to embody a transition in the drivers of growth from mining investment to other parts of domestic demand, and to exports," the RBA said in its quarterly monetary policy statement yesterday. "There remains considerable uncertainty about how this transition will proceed."

GDP would rise 2.25 per cent this year, compared with the 2.5 per cent forecast three months earlier, the central bank said.

Core consumer prices would rise 2.25 per cent in the year to June, below the midpoint of the RBA's target of 2 to 3 per cent.

The growth projections underscore the challenge for Prime Minister Kevin Rudd as he pitches for another term based on economic management before the September 7 election.

Governor Glenn Stevens and his board reduced the overnight cash rate target to a record low of 2.5 per cent this week as a benign inflation outlook allows him to boost non-mining industries, aided by a weaker currency.

"As the terms of trade decline and mining investment falls back from its high level, the exchange rate could depreciate further," the RBA said. "This would help to assist with the required rebalancing of growth in the domestic economy."

The central bank based its forecasts on an unchanged cash rate of 2.5 per cent, while noting this "profile is slightly higher than market expectations", which imply a further cut of 0.25 percentage point in the cash rate by the end of the year.

The RBA said its outlook for mining investment had been revised lower. It said that while the statistics bureau's capital expenditure survey showed the expectations component remained strong, "this is inconsistent with information from the bank's liaison, few new commitments to mining projects and a lack of current expenditure on the development and planning work that would typically precede new projects".

The Australian dollar has fallen 11 per cent against the US dollar in the past three months, the worst performer among a group of 10 currencies, as China's outlook darkened and US Federal Reserve chairman Ben Bernanke signalled for the first time on May 22 that a tapering of bond purchases that have devalued the greenback may be on the cards as the world's largest economy strengthens.

The RBA estimated in the statement that "a 10 per cent depreciation of the exchange rate stimulates GDP growth by 0.5 per cent to 1 per cent over a period of two years or so".