In its latest quarterly Statement on Monetary Policy, the Reserve Bank of Australia (RBA) bumped its near-term forecast for economic growth, while lowering its estimate for growth in 2015.
For the 12-month period ending in June, the RBA increased its projection for gross domestic product (GDP) growth to 3 percent from 2.75 percent. And for the year ending in December, it specified growth of 2.75 percent, which is the midpoint of its previously forecasted range of 2.25 percent to 3.25 percent, and therefore essentially status quo.
But the central bank shaved a quarter point from both the upper and lower thresholds of its projected ranges for each of the 12-month periods ending in June and December 2015. The new forecast ranges call for GDP growth of 2.25 percent to 3.25 percent for the year ending in June 2015 and 2.75 percent and 3.75 percent for the year ending in December 2015.
In making these projections, the RBA assumed an average exchange rate for the Australian dollar of USD0.93, up 4.5 percent from last quarter, and a Brent crude oil price of USD105, up from USD104 in February, among other assumptions.
These revisions reflect the rise in the exchange rate in recent months, which the central bank says will restrain exports and boost imports over the next two years, along with an improved outlook for domestic consumption and dwelling investment over the coming year. The RBA expects the record levels of exports that have helped support the resource sector will ease in the quarters ahead.
The Australian dollar currently trades just below USD0.94, up nearly 8 percent from its low in late January, though down about 14.8 percent from the cycle's high in mid-2011. Analysts forecast the aussie will trade at an average of USD0.89 for the remainder of 2014, before sliding to USD0.86 in 2015, a level at which the currency is expected to remain through at least 2018.
Private-sector economi! sts currently forecast Australia's economy to grow 2.8 percent in 2014 and 2.9 percent in 2015. In 2016, Australia's economy is expected to expand at a rate of 3.4 percent, which means that after three calendar years of below-trend growth, GDP will finally be growing near the country's long-term trend of 3.5 percent annualized.
The RBA's near-term optimism is underpinned by strong growth in resource exports, as well as rising production from mining projects coming on line following the sector's boom in investment. Consumer spending has also been buoyed by record-low interest rates and rising real estate values.
Over the longer term, however, the decline in mining investment is expected to gain momentum as larger projects commence operation and add to the glut of production. Meanwhile, despite promising signs in the housing and retail spaces, the non-mining sectors have yet to take over leadership of the country's economy.
And while the exchange rate has depreciated considerably, as noted above, the central bank characterizes its current level as relatively high. Indeed, as Westpac Chief Economist Bill Evans observes, the aussie's ascent since late January appears to be one of the main factors dampening the bank's medium- to longer-term outlook.
Still, the bank expects its high level of monetary stimulus will eventually flow through to consumer demand, boosting business investment and employment. And longer term, the RBA sees liquefied natural gas (LNG) exports adding significantly to the country's economic growth, starting around 2016.
Until then, the central bank says the significant headwinds facing the economy continue to merit an extremely accommodative monetary policy. As such, the RBA will likely keep interest rates at record lows for some time.
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