Australia Central Bank mutes outlook

SYDNEY (AFP): Australia’s Central Bank scaled back its forecasts Friday, warning of muted growth and a ‘subdued’ outlook as the commodities-driven economy transitions away from mining. The Reserve Bank of Australia said it expected growth of 2.5% and inflation of 2.25% for the year ended 31 December, compared with 2% to 3% for both forecast in February.

“Overall, the subdued outlook over the next year or so continues to reflect the approaching peak in mining investment, ongoing fiscal consolidation and the high level of the Australian Dollar,” the RBA said in a quarterly statement on monetary policy.

The bank said mining investment ‘is still expected to be close to its peak’ with a gradual shift towards the non-mining sectors of the economy and a greater emphasis on domestic spending. “While there are signs that this rebalancing is beginning, there remains considerable uncertainty about how it will proceed,” it said.

It said Australia’s economic expansion was expected to be ‘a bit below’ long-term averages in 2013, before returning to levels of up to 3.5% in 2014 and 4.0% in 2015. Treasurer Wayne Swan noted that the bank had described its outlook on the major indicators as ‘essentially unchanged’ from February and said Australia remained well positioned by global standards.

“This report today I think confirms the underlying strength of the Australian economy,” Swan told reporters. “We’re making a transition from an investment boom in resources to a very strong export-led surge. We’re moving from the peak of the investment phase in resources and moving to a new high in terms of export volumes.”

He added that “These transitions from resource-led growth to non-mining growth are not always smooth, big transitions rarely are.” The RBA slashed interest rates to a record low 2.75% this week in a bid to stimulate Australia’s non-mining economy, citing sluggish growth and rising unemployment as well as the protracted strength of the Dollar.

The commodities-linked currency was hovering just above parity with the greenback at US$ 1.0076 in afternoon trade. It has not dipped below US$ 1 since 14 May last year. The RBA said the outlook for Government spending was clouded by ‘considerable uncertainty’ ahead of the 14 September national elections, with a sharp fall in revenues expected to be revealed in next week’s budget.

Finance Minister Penny Wong warned of AU$ 17 billion (US$ 17.2 billion) slump in Government earnings on Tuesday due to the high dollar’s impact on company profits. Analysts said the latest statement affirmed the bank’s earlier warnings of a bumpy restructuring ahead.

“With the slowdown in mining investment now upon us, the response to (earlier) rate cuts remaining patchy, inflation likely to remain benign and the Australian Dollar remaining relatively strong, further easing is likely with the cash rate expected to fall to 2.5% in the next few months,” AMP Capital economist Shane Oliver said. “Ongoing fiscal tightening in Tuesday’s budget will likely add to the case for more rate cuts.”