Australia’s economy needs to rebalance from mining-led growth to non-mining-led expansion. We remain optimistic this will happen but it has been slower than expected and we have thus cut our forecasts for the economy’s growth.
The mining sector accounts for around only 10 per cent of value added in Australia and even throwing in everything that relates to a “mining investment boom”, it is still below 20 per cent of the economy. More than 80 per cent is non-mining and many of the other sectors are also interest-rate sensitive, including household consumption and the housing market. We expect low interest rates to continue to lift household demand.
The mining sector accounts for around only 10 per cent of value added in Australia
While doomsayers are suggesting that the end of the mining investment boom will leave the economy with little to replace it, we remain cautiously optimistic that the other 80 per cent of the economy can grow sufficiently to maintain solid growth in Australia. We are not forecasting an impending recession.
But at the end of 2012 we highlighted four risks to a smooth rebalancing. These were: the government continuing its austerity drive and pushing Australia off a “fiscal cliff”; monetary policy proving less powerful than expected; global growth weakening; and, the Australian dollar remaining too high.
The first risk was a non-event. The government backed away from its “fiscal austerity” plans and the budget is now supportive rather than contractionary. On the second risk, there were strong early signs that monetary policy was working, though more recent figures have been less convincing: while the housing market continues to strengthen, consumer sentiment has turned down.
The third and fourth risks have also been big challenges. While the US didn’t drive off its “fiscal cliff” and the euro didn’t implode, China’s recovery has been weaker than expected and Asia’s growth lacklustre.
The Australian dollar has traded at around 30-year highs, despite lower commodity prices. While the first-quarter annual GDP growth of 2.5 per cent was only slightly weaker than the forecast 2.7 per cent, the components revealed a slower-than-expected pace of rebalancing. In particular, the household saving rate has remained high despite interest rate cuts of 2 percentage points.
Exchange-rate sensitive industries, including manufacturing, have also been weak as the strong dollar has constrained their activity.
As a result, we are revising down our GDP forecasts for 2013 from 2.9 per cent to 2.5 per cent and for 2014 from 3.1 per cent to 2.8 per cent. We still expect rebalancing, but there is likely to be a mild mining gap. The recent Australian dollar depreciation should help support the rebalancing act, but we now think the central bank may need to cut rates a little further to support growth.
This research was first published on 6 June 2013.