The RBA has slashed its growth forecast for 2013.
Mining investment is sliding faster than expected, the Reserve Bank reports, and the biggest risk to the Australian economy is that the slide could accelerate, in response to cost overruns and below-trend global growth in demand.
The Reserve’s latest statement of monetary policy is less bearish that some had feared, but anything but bullish. It slashes the bank’s economic growth forecast for 2013, while leaving the forecasts for 2014 untouched and even nudging its forecast for 2015 a little higher.
But all that is heavily qualified by risks and uncertainties, as it tries to gaze into the unknowable future. And the biggest risk is an acceleration of the slide in mining investment, with the bank’s business liaison reporting that the miners are downing tools on designing new mines.
‘‘While the expectations component of the (March) Capex survey remains strong, this is inconsistent with information from the Bank’s liaison, few new commitments to mining projects, and a lack of current expenditure on the development and planning work that would typically precede new projects’’, it reports.
‘‘This is especially noticeable in the coal industry, where lower prices of late have led to a significant curtailment of this type of expenditure.
‘‘Give this, the expectation is that mining investment will decline somewhat over the next year or so, before falling away more noticeably thereafter.’’
The RBA says the main game for Australia’s economy is ‘‘a transition in the drivers of growth from mining investment to other parts of domestic demand, and to exports’’. And while it is cautiously optimistic that the transition will be relatively smooth – albeit with unemployment rising into the 6s - it adds a strong note of caution.
‘‘There remains considerable uncertainty about how this transition will proceed. In particular, the forecast for mining investment remains uncertain, reflecting the timing of investment work on large projects, and the possibility of cost overruns.
‘‘Also, there are still several proposed large projects slated for later in the forecast horizon (2014-15), and there is considerable uncertainty about their prospects. With little planning and development for other new policies underway, mining investment could fall away faster than anticipated.
‘‘However, with commodity prices forecast to only decline modestly, lower domestic costs in foreign currency terms (as a result of exchange rate depreciation and reduced demand for labour inputs) could lead to new projects being slated.’’
The Reserve’s baseline case is for us to muddle through. It has slashed its forecast of year-average growth in 2013 from 2.75 per cent to 2.25 per cent, continuing the slow pace of growth in the six months to March. With the population assumed to grow by 1.8 per cent a year, the real bottom line, GDP per head, is expected to grow by roughly 0.5 per cent, just a third of its long-term average.
But the Reserve has left its forecasts for 2014 unchanged at between 2.25 and 3.25 per cent, the wide range of possible outcomes reflecting its uncertainty. By the end of next year its best guess is that GDP growth will be back to its trend rate of 3 per cent, and it thinks could rise to 3.5 per cent by the end of 2015.
The unchanged forecasts for 2014 however result from radically changed assumptions. It assumes an exchange rate of 90 US cents, as against $US1 in its May forecasts. It assumes a cash rate of 2.5 per cent into the future, reflecting this week’s rate cut. These are just technical assumptions, but they have pushed the forecasts up considerably from what they would have been.
It estimates that a 10 per cent depreciation of the currency lifts GDP growth by between 0.5 and 1 per cent over a two-year period. Add in the interest rate cut, and the combined stimulus from the RBA and the currency markets should play a vital role in shoring up growth in the medium term.
It will also add to inflation, the Reserve says, and by a similar margin. The fact that it nonetheless sees inflation as rising only to the middle of its target range of 2 to 3 per cent suggests even underlying inflation might otherwise have sunk below its zone (as the next quarter’s headline inflation figure almost certainly will).
The caveat it adds is that a similar impact on inflation could be expected if the currency declines by another 10 per cent to a bit over 80 US cents, as many in business hope, and some expect. ‘‘A further depreciation could see inflation around the top of the target’’ it warns, without stating the corollary that, other things being equal, that would trigger a rate rise.
The Reserve highlights the fall in wage growth, and predicts it will continue to be around 3 per cent through the medium term. But in part, this is because it expects unemployment to keep drifting up for some time – not alarmingly, but like Treasury, it sees it hitting the 6s.
But all this is hedged with many uncertainties. The Reserve puts these forecasts forward as its best guesses. Things could be work out better than it projects, they could work out worse. One senses that, despite its new neutral stance on where rates go next, it would be more surprised if things turn out better than if they turn out worse.