Australia’s challenge of making up for unwinding mining investment with expansion in other industries is going to get tougher next year, Goldman Sachs said, even as it forecast the central bank would keep interest rates steady.
Unemployment would climb to 6.25 percent in the middle of next year and annual economic growth would slow to 2 percent from an estimated 2.2 percent this year, Goldman economists led by Tim Toohey said in a report yesterday.
He expects the currency would hover in a range between US$0.66 and US$0.72.
“The path of the Australian dollar will prove influential in shaping expectations for interest rates,” Toohey said, ascribing a 45 percent chance of a rate cut in the first half of next year. “We expect that the RBA [Reserve Bank of Australia] will leave interest rates on hold in 2016 and 2017 before commencing a modest interest-rate hiking cycle in early 2018.”
The RBA cut rates twice this year to a record-low 2 percent, and Governor Glenn Stevens said last week that while there were better prospects for the economy to improve, low inflation provided scope to ease further if needed.
Since then, data have shown the economy grew 2.5 percent in the third quarter from a year earlier and the country recorded its biggest back-to-back monthly jobs gain in almost 28 years.
Australia is grappling with fallout from plunging prices of its commodity exports, including iron ore, as key trading partner China’s economy slows.
Toohey said that falling mining investment would subtract 2 percentage points from economic growth next year, compared with an estimated 1.5 percentage points subtraction for this year, while housing would add nothing next year after contributing an estimated 0.4 percentage point this year.
Net exports are predicted to contribute a record 2 points to growth next year, up from 0.8 point this year, he said.
“In short, we continue to be well below consensus for economic growth in 2016 and anticipate low interest rates for longer as the familiar threats of the commodity price income shock, rapidly falling business investment and the challenge of addressing Australia’s deteriorating fiscal position weigh on economic growth,” Toohey said.
Economists anticipate that Australian Treasurer Scott Morrison will flag a further A$3 billion (US$2.2 billion) deterioration in the government’s budget and weaker-than-forecast growth in a mid-year update to be released next week.
The government would project a budget deficit of A$38 billion for the year through June next year in its mid-year economic and fiscal outlook on Tuesday, according to the median forecast of 18 economists surveyed by Bloomberg.
That would be wider than its May estimate of A$35.1 billion.
Morrison would also lower the forecast for growth to 2.5 percent from 2.75 percent, the survey said.
“We’ve got a spending problem,” Morrison said in Sydney.
“We’ll have announcements next week with the budget update,” he said, when asked about possible spending cuts.
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