Will Australia's blues linger into 2015?

Economists forecast another year of doom and gloom ahead, as income growth weakens and our terms of trade declines. But there could be a few bright spots.

At a glance, 2015 doesn’t promise to be a stunning year for the Australian economy, at least from the perspective of a handful of our most prominent economists.

Taking a leaf out of Tony Abbott’s book, Bank of America Merrill Lynch chief economist Saul Eslake sums up next year’s outlook with a simple three-word slogan: “below-trend growth”.

He cites weaker income growth, declining terms of trade and gradually rising unemployment as the defining economic factors for the year.

But it’s not all gloom and doom. Australia’s expected LNG boom has buoyed HSBC’s chief economist Paul Bloxham’s view of 2015. He expects a weak first half, with a recovery by the end of the year due to rising gas exports.

A hint of advice for anyone planning an overseas holiday in 2015: if you can plan that far ahead, book next year’s overseas holiday now. Forecasts suggest the Aussie dollar’s value relative to the US greenback and other currencies is only going to get worse.

All of the economists we talked to expected the dollar to fall further in 2015, although some expected a more aggressive decline than others.

We would be remiss not to mention most notable forecast first.

Earlier this week, RBA governor Glenn Stevens said he would like to see the dollar fall to 75c by December 2015. In 2013 Stevens said he would like to see the dollar fall from around 90c to 85c. For the record, it’s now hovering at around 83c.

As for the other economists, Market Economics' Stephen Koukoulas suspects the dollar could fall as far as 75c by the end of the year. Meanwhile, Eslake reckons the dollar could hit 77c at the end of 2015, but travel down to 73c by the end of 2016. Westpac’s chief economist Bill Evans begs to differ. He predicts that weakness in the US dollar towards the middle of the year will hold the Australian dollar above 80c.

Evans isn’t just optimistic on the dollar. He also suspects the Reserve Bank will deliver two consecutive cuts to the official cash rate in February and March next year. He argues that this action is necessary to ensure that both business and the wider economy hit the ground running in the New Year. Market Economics' Koukoulas agrees. He forecasts a rate cut early in 2015 followed by another cut shortly afterwards as a means of rekindling economic activity.

Meanwhile, Merrill Lynch’s Eslake and HSBC’s Bloxham suggest the central bank’s freeze on rates could drag on well into 2015. That view is more controversial than advocating a cut, given the official cash rate has held at 2.5 per cent since September 2013. Eslake reasons that the central bank now sees little purpose in cutting rates other than to drive up the housing market. Bloxham agrees, but takes Eslake’s call a step further, forecasting a rate hike in the last quarter of 2015 due to his prediction on a late 2015 economic uptick.

Perhaps the major theme emanating from all of these comments is to expect the trends we’ve seen in the latter half of this year to continue into 2015, and that Australia’s economic stagnation will likely be overshadowed (and dictated) by an expected US recovery and the potential for a slowdown in China. 

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