SYDNEY (AFP) – Pressure is building on Australia’s central bank to cut interest rates from their record lows as growth in the resources-driven economy, already faltering on the back of China’s slowdown, takes a further hit, analysts say.
The Reserve Bank of Australia (RBA) has repeatedly said it will continue to maintain a “period of stability in interest rates”, but softening GDP growth figures last week sparked a flurry of economists forecasting further monetary policy easing.
That would take the cash rate below 2.5 per cent, where it has been for 16 months.
“The GDP read… is creating a very dark shadow over the state of the Australian economy with income growth now in recession,” IG markets strategist Evan Lucas said.
The data showed the economy expanded by just 0.3 per cent in the third-quarter, far below consensus estimates of 0.7 per cent, to take the annual growth rate to a below-trend 2.7 per cent.
“The pressure on growth in 2015 is ratcheting up as key commodities remain in bear markets and if housing cools, this will only accelerate,” added Lucas.
The slowdown in China, Australia’s largest trading partner, is already weighing on the resources sector and hurting the wider economy.
Continuing fears about the health of the world’s second-largest economy, which helped fuel Australia’s unprecedented mining investment boom, has been reflected in the local dollar’s high sensitivity to fluctuating Chinese data.
Just last week, the exchange rate slumped to a fresh four-year low after weak manufacturing figures raised concerns about China’s growth outlook.
The new forecasts are in part driven by a plunge in commodity prices and the lack of a similar decline in the exchange rate to soften the blow.
Lower prices, particularly for Australia’s biggest export iron ore, were also eroding the national income, Treasurer Joe Hockey said.
The mining investment boom has helped Australia avoid recession for more than two decades, but the rebalancing towards non-resources led growth has been uneven.
While record low interest rates have fuelled a surging housing market, consumer confidence has floundered amid tepid wages growth and following a tough federal budget in May in which the government pledged to cut back on welfare and spending.
There has also been a slower-than-expected pick-up in business investment outside the mining sector, while the unemployment rate has been rising, hitting an almost 12-year high of 6.2 per cent in October.
These factors have seen Australians continue to save at near record levels and balk at taking on more debt.
“The baton change in the economy has been delayed and we are now facing the environment where mining is a lot weaker than expected because of commodity price falls globally,” Macquarie Bank’s head of Australian economic research James McIntyre told AFP.
“And we haven’t been positioned adequately on the non-mining side to pick it up.”
The RBA’s willingness to consider measures to curb investor lending for housing, which would allow the central bank to drop the cash rate without fearing that residential property would become overheated, has also opened the door to easing.
Deutsche Bank, Goldman Sachs and Westpac Bank all last week forecast 50 basis points of cuts next year to take the cash rate down to 2.0 per cent.
They were joined by AMP Capital, which predicts a 25 basis points easing in February or March and a 50 per cent chance of another cut in 2015.