The Reserve Bank will ease interest rates again as Australia becomes the only developed country other than Japan to experience slowing growth and the dollar weakens to US85¢ by the end of next year, Goldman Sachs analysts believe.
The analysts forecast a rate cut in March, and no increases in the cash rate next year. The first rate rise is expected in early 2015 as the economy undergoes a "very slow transition" from mining-led growth.
They expect Australia to record economic growth of 2 per cent next year and 2.6 per cent in 2015.
"Relative to the acceleration forecast in the global economy, in Australia we expect economic growth to decelerate in 2014, anticipate further easing required by the RBA, forecast additional fiscal drag and see a corporate sector set on a path of investment restraint," Goldman Sachs analysts Tim Toohey, Matthew Ross, Christian Lelong and Andrew Boak wrote. "The headwinds of an elevated Australian dollar, ongoing fiscal drag, poor labour income dynamics and a declining terms of trade have weighed upon the non-mining economy's recovery."
A shift from scarcity to excess for some of Australia's key commodities and an ageing population were also likely to weigh on growth, the analysts said.
The report came as markets await a clearer picture of the non-mining sector by way of the release of private capital expenditure forecasts for the current financial year on Thursday. The Bureau of Statistics figures will also include final September-quarter data.
Meanwhile, the Australian dollar remained on track to record its weakest month since June.
Rochford Capital director Derek Mumford said it had declined for six days in a row, as fears about the Chinese economy as well as heightened expectations of a near-term taper by the Federal Reserve weighed on the local currency.
The dollar was buying US91.24¢ in late trade. It was also near a year low low against the British pound and the euro. The dollar was trading at 56.26p and 67.14 euro cents late on Wednesday. The dollar has fallen to as low as 56.21p and 66.53 euro cents over the past year.
Despite the soft Australian outlook, the analysts said the recovery in the non-mining sectors of the economy had started and was expected to broaden and strengthen, "supported by historically loose financial conditions, an ongoing upswing in housing investment and near-term decline in the [Australian dollar] which should provide important support to corporate earnings".
The risks to the outlook included a resilience in commodity prices and the search for yield continuing to push the dollar higher.