By Michael Heath
The Reserve Bank of Australia lowered its growth outlook as the economy transitions from mining investment, a process that may be aided by the currency falling further from its still “high level.”
“The forecast for Australian GDP 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 released in Sydney today. “There remains considerable uncertainty about how this transition will proceed.” Gross domestic product will rise 2.25 percent in the year to December 2013, compared with 2.5 percent forecast three months earlier, the central bank said. Core consumer prices will rise 2.25 percent in the year to June 2014, below the mid-point of the RBA’s 2 percent to 3 percent target.
The growth projections underscore the challenge for Prime Minister Kevin Rudd as he pitches for another term based on economic management ahead of the Sept. 7 election. Governor Glenn Stevens and his board reduced the overnight cash-rate target to a record-low 2.5 percent 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 percent, while noting this “profile is slightly higher than market expectations” which currently imply a further 25 basis point cut in the cash rate by the end of the year.
The RBA said its outlook for mining investment has been revised lower. It said that while the statistics bureau’s capital expenditure survey showed the expectations component remains 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 Aussie has fallen 11 percent against the U.S. dollar in the past three months, the worst performer among group of 10 currencies, as China’s outlook darkened and Federal Reserve Chairman Ben S. Bernanke signaled for the first time 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 percent depreciation of the exchange rate stimulates GDP growth by 0.5 percent to 1 percent over a period of two years or so.”
It projected a “slightly weaker” outlook for the global economy as growth in China, Australia’s biggest trading partner, “is now unlikely to pick up much, if at all, in coming quarters. Rather, it is expected to remain at a pace that is close to the official target.”
Industry has been squeezed by a currency that held above $1 from mid-June last year to May 9, the longest stretch above parity with the U.S. dollar since the Aussie was freely floated in 1983. A private gauge released Aug. 1 showed manufacturing slumped 7.6 points to 42 last month, the biggest decline since April. Fifty is the dividing line between growth and contraction.
Australian employers unexpectedly cut payrolls by 10,200 in July and unemployment held at an almost four-year high of 5.7 percent as fewer people sought work, denting Rudd’s bid for a come-from-behind election win. The government on Aug. 2 predicted the unemployment rate would rise to an 11-year high of 6.25 percent by July.
“Employment growth is expected to be only modest over the next few quarters, consistent with the below-trend growth of the economy,” the central bank said today. “This will see the unemployment rate increase gradually for a year or so.” The RBA’s 2.25 percentage points of rate cuts since November 2011 are designed to boost demand and hiring in the nation’s south and east to pick up some of the slack in the economy as the mining investment boom peaks. “Employment growth has eased in mining areas, but growth in employment has remained stronger in some service sectors and in the larger southeastern states,” the central bank said. “The bank’s liaison also suggests that firms remain cautious about hiring staff.”
There are signs looser policy is having some effect. Australian house prices rose by the most in more than three years in the second quarter, jumping 2.4 percent. “Conditions in the housing market continue to improve,” the central bank said today. This, “along with strong population growth and the relatively low level of dwelling investment for some years now, point to a continued rise in dwelling investment in the period ahead.”
The political dividend for Rudd from lower borrowing costs stems from the boost it provides the approximately 90 percent of mortgagees with variable-rate loans. At the same time, the government last week announced a blow out in the budget deficit this fiscal year to A$30.1 billion. Rudd is framing the vote as a battle between David Cameron-style austerity from the opposition and his own program that allows the deficit to widen as it prioritizes jobs. Labor trailed the opposition by 4 percentage points on a two-party preferred basis in a Newspoll published Aug. 5. “Federal and state governments are planning to undertake fiscal consolidation over the next few years, and so growth in public demand is expected to be low relative to its historical average,” the RBA said.