RBA cuts growth forecast for third time
Australia’s economic prospects have been downgraded by the Reserve Bank for the third time this year, as weak export prices, a stubbornly high dollar and budget cuts take a hefty toll on growth.
The cut to forecasts came as global markets were rocked by fears of the looming ‘‘fiscal cliff’’ in the United States, which has the potential to drag the world’s biggest economy into deep recession.
Local shares fell another 0.5 per cent as investors fretted over the legislated tax rises and spending cuts, which will automatically come into force in the US if politicians cannot break the deadlock over how to restore the nation’s finances.
The Prime Minister, Julia Gillard, acknowledged the concerns, but insisted Labor’s plan to deliver a surplus was on track, despite the growing market jitters.
‘‘Of course we are concerned about the fiscal cliff in the US and we are concerned that if this matter isn’t resolved it will have severe implications for the economy of the United States and that’s got implications for the global economy including our own,’’ Ms Gillard said on Friday. ‘‘But I’m not going to deal with hypotheticals about our budget position.’’
The Reserve also identified the fiscal cliff as a key risk to its forecast, but assumed the US would avoid this disaster outcome by reaching a political resolution.
Amid weaker Chinese demand for iron ore and coal, the central bank said the peak in mining investment would be smaller and earlier than expected, which would cause the economy to slow.
Over the 2013 calendar year it said the economy would grow by between 2.25 and 3.25 per cent, down slightly from its previous forecast of 2.5 to 3.5 per cent. In February its top range for growth in 2013 was 4 per cent.
The trim to the Reserve’s forecasts confirmed it was likely to cut official interest rates again later this year or early in 2013, economists said.
Interest rates have been cut by 1 percentage point this year, and the Reserve said this was starting to revive some parts of the economy such as housing construction.
But with jobs growth sluggish and unemployment on the rise, the board would be eyeing non-mining activity as the peak in resources investment came closer.
‘‘As the peak in resource investment approaches, the board will be monitoring the strength of other components of demand, as well as trends in costs and prices,’’ the Reserve’s Statement on Monetary Policy said.
The cut to its outlook was mainly driven by the plunge in commodity prices since its last statement in August. This has forced miners to put multibillion-dollar projects on ice.
The Australian dollar has also failed to fall in line with commodities, hurting miners that import capital equipment and export industries like manufacturing, tourism and education.
‘‘The current level of the exchange rate could ... have a more contractionary effect on output than anticipated,’’ the Reserve said.
Budget consolidation at a state and federal level would also subtract between 0.75 and 1.5 percentage points from economic growth this financial year, it said.
Despite the slowing economy, the Reserve raised its inflation forecast for this financial year, to 3.25 per cent, after a higher-than-expected reading in the latest quarter.
The bank expects inflation to return to the 2 to 3 per cent comfort zone after that, but it stressed that this would depend on further growth in productivity.
‘‘While productivity growth appears to have picked up substantially over the past year, there is considerable uncertainty around the prospects for ongoing productivity growth,’’ it said.
The Reserve also downgraded its growth outlook in Statements in February and May.