Exports, housing to underpin Australia growth as mining cools: poll

[October 24, 2014]  By Ian Chua

SYDNEY (Reuters) - Australia's economy could be entering a period of growth that is not too hot and not too cold thanks to strength in exports and housing, with inflation likely to be well contained within the central bank's target band.

But it probably won't be the "goldilocks" moment that households are hoping for as the labor market is seen remaining subdued and unemployment is not likely to fall consistently just yet.

The latest Reuters poll of analysts expect Australia's A$1.6 trillion ($1.4 trillion) of gross domestic product to expand by 3.1 percent in 2014, topping last year's pace of around 2.9 percent - already among the fastest in the developed world.

Growth is then seen steadying near 3.0 percent in 2015, extending a run of good fortune for a country that has not suffered a recession in over two decades. The forecasts were unchanged from a previous Reuters survey in July.

Annual inflation should run at 2.6 percent in 2014 and 2015, according to the poll, comfortably in the middle of the Reserve Bank of Australia's (RBA) medium-term 2-3 percent target range.

"We've got this funny situation in Australia where growth can be 3 percent because imports fall and exports do well," said Ben Jarman, an economist at JPMorgan.

"But we still think the labor market is weak and real wages are under pressure, so per capita income will still be on the slide."

Australia's unemployment rate was estimated at 6.1 percent in September, the highest in over a decade, although problems in the seasonal adjustment process by the government's statistics office has made it harder to judge the true state of the labor market.

Using a range of indicators, the RBA concluded this month that conditions in the labor market remained subdued, adding it would probably be some time before the jobless rate declined as there was still some spare capacity.

Indeed, while exports and housing are helping offset the impact of an ageing mining boom, there are only tentative signs of a pick up in spending and hiring intentions by other businesses so far.

The RBA is doing its part by keeping borrowing costs low. It cut its cash rate to a record low 2.5 percent in August 2013 and has pledged a period of stability.

That has helped lift demand for homes and household wealth, which in turn has spurred a revival in dwelling construction. The RBA is counting on spillover effects through consumption and jobs and eventually a broadening to other parts of the economy.

The historically high Australian dollar, however, remains a hurdle. Despite last month's drop, it is offering less help than would normally be expected in achieving balanced growth.

The "Aussie" slid 6.3 percent against the greenback in September, its biggest monthly fall in over a year. But it was still a relatively minor fall compared with bigger declines in some commodities such as iron ore, the country's most valuable export.

Another risk comes from the ongoing belt-tightening efforts by both state and federal governments, which could dampen consumption.

Analysts said global growth concerns, particularly for the euro zone and persistent worries about slower growth in China, Australia's biggest export market, could also throw a curve ball at the economy.

(Editing by Kim Coghill)
 

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