This Forecaster Thinks Australia Is Facing Its Weakest Period Of Growth Since The '90s Recession

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The Australian economy is making an economic transition away from the mining boom to more domestically focused growth drivers.

It’s a transition that will take time and last week RBA governor Stevens said he’d done what he could and it was time for “Animal Spirits” to take over.

But it is a transition that is not going to be easy, according to economic forecaster BIS Shrapnel which this morning released a report claiming that Australia’s “domestic economy set for weakest four-year period since the 1990s’ recession”.

While they note that the housing recovery is on track they believe that the high Aussie dollar is delaying “a recovery in non-mining business investment”. But there won’t be enough non-mining investment growth “to offset falling mining investment over next four years”.

The overall GDP number that BIS is expecting is 3% but this is likely to continue to be driven by mining with employment growth acting to “stymie domestic demand”.

Richard Robinson, senior economist at BIS Shrapnel, said employment growth will be soft.

“We expect that only 668,000 jobs will be created over these next four years. It’s little better than the last four years, and it will hardly make a dent in unemployment numbers.”

That is not to say that BIS is pessimistic on the overall outlook for growth but they believe the Aussie dollar is materially overvalued, noting that they believe the dollar “is reasonably valued from the point of view of competitive domestic trade-exposed industry when it is valued at around US 75 cents”. That’s a long way from the 93 cents the AUSUSD rate is sitting at this morning.

Ultimately though, BIS believes there will be a tightening of productive capacity along with an eventual fall in the Aussie, which will ignite Stevens’ “animal spirits” and drive a recovery in non-mining business investment.

“But that, we believe, is at least 12 to 18 months away,” Robinson said.

Longer term though, the BIS report “predicts strong growth will again resume from later this decade, with GDP and domestic demand growth lifting to around 3.5 per cent in 2018/19 and strengthening through early next decade”.

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