SYDNEY, Jan 22: Australia looks set for another year of sub par growth as the air rapidly escapes from its once high-flying resources sector, though analysts are optimistic that better times will return in 2016 as the rest of the economy rebalances.
The latest Reuters poll of analysts expects Australia’s A$1.6 trillion ($1.3 trillion) of gross domestic product to expand by 2.7 percent in 2015, steady on last year but a downward revision from October’s forecast of 3.0 percent.
Much of the mark down reflects steep falls in prices for many of Australia’s major commodity exports, notably iron ore, which are taking a chunk out of national income at a time when mining investment is already on the wane.
‘There are mounting downside risks to the medium term growth and inflation outlooks, for sure,’ says Stephen Walters, chief economist at JPMorgan. ‘The drop-off in inflation and the mining capex cliff increasingly look steep as commodity prices nose-dive.’
Indeed, a slide in petrol prices is thought to have pulled consumer price inflation down to 1.8 percent or less last quarter, under the Reserve Bank of Australia’s (RBA) long term target band of 2 to 3 percent. Even measures of underlying inflation are seen slowing toward 2 percent and staying low for longer. In the Reuters poll, analysts tipped inflation would average 2.2 percent this year, from 2.5 percent in 2014. All of which would seem to offer scope for further cuts in interest rates, particularly as the recent rash of easings across the globe threatens to push the Australian dollar higher.
Switzerland, Denmark, India, Turkey and Canada have all cut rates, while the European Central Bank is launching a campaign to buy sovereign bonds.
Interbank futures <0#YIB:> have swung sharply to imply a 36 percent chance that the RBA will cut its 2.5 percent cash rate by a quarter point when it next meets on Feb. 3. A move to 2.25 percent is now fully priced in by April. REASONS TO BE CHEERFUL
Still, there are reasons to think the RBA could hold off.
The housing market remains strong with approvals to build new homes at an all-time high in November and sales of new apartments the highest since 2003. Demand for housing is underpinned by one of the fastest rates of population growth in the developed world at 1.6 percent. Sales of new vehicles jumped in December to be the strongest for any month of last year, while retail sales are growing at a healthy 5 percent per annum. The precipitous fall in petrol is providing new spending power, lowering the total annual fuel bill of Australian households by an estimated A$3.7 billion. The labour market also seems to be healing as employment far outstripped forecasts in November and December, lowering the jobless rate to 6.1 percent from a decade-peak of 6.3 percent.
‘Recent economic data, especially over the Christmas-New Year period, has generally been positive,’ said David de Garis, a senior economist at National Australia Bank. ‘Together, they point to some stabilisation in the domestic economy in the December quarter, arguing for the RBA to leave rates on hold at its upcoming meeting.’ The poll shows most analysts do see better times ahead with the economy forecast to expand by 3.2 percent in 2016.
(AGENCIES)
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