Australia economy keeps growing as worst of mining drag fades

[SYDNEY] Australia's economy is seen weathering an unwelcome rise in the local dollar and uncertainty over China this year, while the worst fallout from a mining downturn may finally be over.

The latest Reuters poll of analysts expects Australia's A$1.6 trillion (S$1.62 trillion) of gross domestic product (GDP) to expand 2.6 per cent this year, unchanged from the previous poll. Growth was forecast at a solid 2.9 per cent for 2017.

That would actually be a step down from last year when the economy surprised everyone by expanding at a 3 per cent pace, well above previous' forecasts of 2.3 per cent.

Gains in consumer spending, new home building and export volumes all played a part in the better outcome. The improving mood was clear in a closely watched survey of Australian business out this week that showed firms were enjoying the best conditions in eight years.

"A jump in both business conditions and confidence provides more assurance that the Australian economy is weathering the global challenges well, and is successfully transitioning through the end of the mining boom," said Alan Oster, chief economist at National Australia Bank.

The unwinding of a once-in-a-century bonanza in mining investment has taken a chunk out of growth in recent years, while a slump in commodity prices has eaten into export earnings, company profits, wages and tax revenues.

Yet the Reserve Bank of Australia (RBA) estimates that the drag on growth from mining will peak this year and ease thereafter. Some are even more optimistic.

"In our view the local economy is about three quarters of the way through the adjustment path involving the decline in mining related investment," says Michael Workman, a senior economist at Commonwealth Bank of Australia.

"Accommodative monetary and fiscal policy settings have assisted with the adjustment by boosting interest rate sensitive areas of the economy," he added. "The lower Aussie has also lifted activity in education, tourism and accommodation."

A recent bounce in the local dollar has undone a little of that stimulus, spurring speculation the RBA might cut interest rates from an already record low of 2 per cent.

A potential trigger for an easing could come later in April when inflation figures for the first quarter are likely to show underlying inflation stood at the very floor of the RBA's 2 to 3 per cent target band.

The outlook is also benign with analysts predicting consumer price inflation would run at 1.9 per cent this year, down from 2.3 per cent expected in the last poll.

They also assume Australia will dodge the deflation that so bedevil Europe and Japan, with inflation seen rising to 2.4 per cent over 2017.

REUTERS