RBA downgrades economic growth

The Reserve Bank of Australia has downwardly revised its gross domestic product (GDP) growth forecast for the year to December, but maintained its outlook on inflation.

In the RBA's August statement on monetary policy, the central bank revised GDP growth down to 2.25 per cent in the year to December, from 2.5 per cent in its May statement.

The bank kept its CPI inflation outlook steady at two per cent, the same as in the previous statement.

“GDP growth is expected to remain a little below trend at close to 2.5 per cent through to mid 2014, before picking up to above-trend growth by the end of the forecast horizon as the global economy experiences above-trend growth and the stimulatory effects of the recent exchange rate depreciation and current low level of interest rates lead to an improvement in business conditions and so investment," the bank said.

The central bank uses its control over the cash rate to keep inflation between two to three per cent over the medium term.

The bank's 2014 GDP growth forecast is unchanged at 2.5 per cent to 3.5 per cent.

CPI inflation for the year to December 2014 is expected to be two to three per cent, the same as the RBA's previous forecast.

The bank said its forecast for economic growth was based on the expectation that non-mining sectors would fill the gap left by the decline in mining investment.

But, the RBA said, "there remains considerable uncertainty about how this transition will proceed".

"The forecast for mining investment remains uncertain, reflecting the timing of investment work on large projects and the possibility of cost overruns."

With few new projects in the pipeline, mining investment could drop off faster than anticipated, the RBA said.

"The forecasts of non-mining business investment have a more muted recovery, at least initially, than in past cyclical upturns."

However, further depreciation of the Australian dollar could see a faster pick-up in non-mining investment, it said.

The RBA said further depreciation of the exchange rate would help to assist with the required rebalancing of growth in the domestic economy.

A 10 per cent depreciation of the exchange rate could stimulate growth by half to one per cent over two years or so, according to the RBA's estimates.

"Further depreciation of a similar magnitude to that already experienced to date could, for example, deliver above-trend growth sooner than currently forecast."