U.S. Markets closed

Tepid growth seen while Australia searches for new growth source: Poll

A geologist refines an iron ore core sample before cataloguing it at an Atlas Iron Limited's prospective iron ore mine site near Port Hedland, about 1,600 km (960 miles) north of Perth, May 26, 2008. REUTERS/Tim Wimborne

By Ian Chua

SYDNEY (Reuters) - Australia's transition away from mining-led growth will be a drag on the economy over the next year or so, while a stubbornly high local dollar stifles other activity - even with interest rates at record lows.

That's the finding of the latest Reuters poll of analysts who expected Australia's A$1.5 trillion of gross domestic product (GDP) to grow 2.5 percent in 2013, unchanged from the previous forecast in July. The outlook for 2014 was revised down two-tenths of a point to 2.7 percent.

That pales in comparison to the 3.6 percent pace of 2012, when Australia overtook Spain as the world's 12th largest economy. The forecasts also represent below-potential growth for a country that has not seen a recession in 22 years.

"Certainly an important part of Australia's economic story has been the high currency and low confidence. They've been a pretty big deadweight on some parts of the economy," said Michael Blythe, chief economist at Commonwealth Bank.

Australia is going through a challenging time as a decade-old boom in mining investment winds down, while new sources of growth remain elusive.

Recent developments, however, offered some hope with consumer and business sentiment rising strongly following September general elections that put an end to three years of sometimes chaotic minority Labor government.

While it is too early to know if the newfound confidence will persist, the thinking appears to be it will eventually translate into stronger spending and hiring.

Record-low interest rates have also started to spur some sectors of the economy, particularly housing. Sydney, for example, is seeing record auction clearance rates and house prices have risen solidly.

"Australia appears to be at the beginning of a housing price boom - a typical sign that an economic upswing is on the way," said Paul Bloxham, HSBC Australia & New Zealand chief economist.


Threats to the economy include a rebound in the local currency back towards parity against the U.S. dollar and a hard landing for China, Australia's single biggest export market.

In recent weeks, the Australian dollar has seen renewed vigor against the broadly weaker greenback, climbing back towards 97 U.S. cents and halving its 16-percent slide between April to August.

The Reserve Bank of Australia (RBA) has consistently said the local currency at current levels was unsustainable and it would like to see a weaker dollar help to rebalance the economy.

The RBA has done its part by cutting interest rates to a record low 2.5 percent in August and the door remains open to further cuts if needed.

Annual inflation is still comfortably within the central bank's 2-3 percent target band.

Indeed, forecasts in the poll centered on a benign inflation rate of 2.2 percent in 2013, before rising to the mid-point of the RBA's target by 2014.

However, recent rhetoric from the RBA suggested it was in no hurry to ease again and markets are giving only a very slim chance of a further cut in rates in November.

The latest data have bolstered expectations that China is on track for a still respectable 7.5 percent annual growth, underpinning demand for Australia's main export, iron ore.

This quarter's survey also looked at Australia's current account deficit, which is expected to persist at 2.5 percent of gross domestic product for both 2013 and 2014.

(Editing by Eric Meijer & Kim Coghill)