RBA sees slower growth lifting unemployment

[SYDNEY] Australia's central bank lowered its growth forecast, predicted higher unemployment and said it was prepared to adjust policy if needed as business spending fails to fire and China struggles with an economic transition.

"The board will continue to assess the outlook and adjust policy as needed to foster sustainable growth in demand," the Reserve Bank of Australia said Friday in its quarterly monetary policy statement in Sydney. "Growth in the Australian economy is expected to continue at a below-average pace for a little longer than earlier anticipated." Governor Glenn Stevens and his board cut interest rates to a fresh record of 2 per cent on May 5 and said the reduction would "reinforce recent encouraging trends in household demand." That positive comment and the lack of any indication that it could cut further fostered predictions the easing cycle had ended. Today's forecasts paint a more somber picture.

The RBA cut the forecast expansion for 2015-16 by half a percentage point from its February's assessment to a range of 2 per cent to 3 per cent and now expects economic growth to strengthen to "an above average pace" in the 12 months through June 2017. Inflation is predicted to remain inside or slightly below the bank's target.

The central bank said the unemployment rate, currently at 6.2 percent, would probably rise further to peak at 6.5 per cent in the middle of next year "and remain elevated for longer." The RBA revised down its forecast for the terms of trade, or export prices relative to import prices, by 1.5 per cent from February in response to lower commodity prices, and now expects them to decline by about 6 percent in 2015.

Iron ore, Australia's biggest export, sank to a 10-year low at the start of April - in response to weaker demand from China - before going on to cap the biggest monthly gain in almost two years as BHP Billiton Ltd. said it was deferring port works, restraining the pace of its expansion.

"The risks to the outlook for the global economy appear roughly balanced, other than for China where risks remain tilted to the downside," the RBA said of Australia's biggest trading partner.

The central bank is trying to foster a pickup in non-mining business investment to offset tumbling commodity prices and declining spending on resource projects. It signaled the wait for this transition in growth drivers could take longer.

"Indicators of non-mining business investment intentions suggest that a significant pick-up is not in prospect over the next year or so," the central bank said. "Business liaison suggests that firms have spare capacity and are still waiting to see a more substantial improvement in demand conditions before they commit to major new investment projects."

BLOOMBERG