RBA hopes for smooth transition
The Reserve Bank's latest statement of monetary policy is less bearish that some had feared, though anything but bullish. It slashes the bank's growth forecast for this year, while leaving the forecasts for next year untouched and even nudging its forecast for 2015 a little higher.
But all that is qualified by risks and uncertainties, as it tries to gaze into the unknowable future. And the biggest risk is an acceleration of the slide in mining investment.
"While the expectations component of the (March) Capex survey remains strong, this is inconsistent with information from the bank's liaison, few new commitments to mining projects, and a lack of current expenditure on the development and planning work that would typically precede new projects," the Reserve Bank reports.
"This is especially noticeable in the coal industry, where lower prices of late have led to a significant curtailment of this type of expenditure.
"Given this, the expectation is that mining investment will decline somewhat over the next year or so, before falling away more noticeably thereafter."
The RBA says the main game for the economy is "a transition in the drivers of growth from mining investment to other parts of domestic demand and to exports". And while it is cautiously optimistic that the transition will be relatively smooth it adds a strong note of caution.
"There remains considerable uncertainty about how this transition will proceed. The forecast for mining investment remains uncertain.
"Also, there are still several proposed large projects slated for later in the forecast horizon (2014-15), and there is considerable uncertainty about their prospects. With little planning and development for other new policies underway, mining investment could fall away faster than anticipated.
"However, with commodity prices forecast to only decline modestly, lower domestic costs in foreign currency terms (as a result of exchange rate depreciation and reduced demand for labour inputs) could lead to new projects being slated."
The Reserve's baseline case is for the country to muddle through. It has slashed its growth forecast this year from 2.75 to 2.25 per cent, continuing the slow pace of growth in the six months to March. With the population assumed to grow by 1.8 per cent a year, the real bottom line, GDP per head, is expected to grow by roughly 0.5 per cent, or just a third of its long-term average.
But the Reserve has left its forecasts for next year unchanged at between 2.25 and 3.25 per cent, the wide range of possible outcomes reflecting its uncertainty.
By the end of next year its best guess is that GDP growth will be back to its trend rate of 3 per cent, and it thinks could rise to 3.5 per cent by the end of 2015.
The unchanged forecasts for 2014 result from changed assumptions. It assumes an exchange rate of US90¢, as against US100¢ in its May forecasts, and a cash rate of 2.5 per cent into the future, reflecting this week's rate cut. These have pushed the forecasts up considerably from what they would have been.
Frequently Asked Questions about this Article…
The RBA cut its growth forecast for the current year from 2.75% to 2.25%, left next year’s forecast unchanged at a wide 2.25–3.25% range, and suggested GDP growth could return to a trend rate of about 3% by the end of next year and possibly rise to around 3.5% by the end of 2015.
The RBA says mining investment is sliding faster than expected and could accelerate lower because of cost overruns, weaker-than-trend global demand and few new commitments or planning expenditure—especially in coal—making the transition away from mining-led growth uncertain for the economy.
A falling mining investment cycle can slow overall GDP growth, reduce demand for labour and domestic inputs, and create uncertainty in sectors tied to resources. The RBA’s baseline is a ‘muddle through’ outcome, but an accelerated fall in mining spending could weigh on business profits, hiring and investment returns.
The RBA notes that while Capex survey expectations remain strong, liaison information shows few new mining project commitments and little current expenditure on planning and development—especially in coal—implying investment may decline somewhat over the next year and then fall away more noticeably thereafter.
Yes. The RBA says commodity prices are forecast to decline only modestly, and lower domestic costs in foreign currency terms—resulting from exchange rate depreciation and reduced labour demand—could make some new projects more attractive and lead to new project plans being slated.
The RBA’s unchanged forecasts for 2014 reflect new assumptions: an exchange rate of about US$0.90 (versus US$1.00 in May forecasts) and a cash rate assumed at 2.5% into the future, reflecting a recent rate cut.
With population assumed to grow by about 1.8% a year, the RBA expects GDP per head (a rough measure of living standards) to grow only about 0.5% this year—roughly one-third of its long-term average—reflecting the slow overall growth outlook.
The RBA’s baseline view is cautious optimism that Australia will ‘muddle through’ the transition from mining-led growth to other domestic demand and exports, but it warns of considerable uncertainty—particularly whether the slide in mining investment accelerates or whether proposed large projects later in the forecast horizon go ahead.
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