Download AUSTRALIA UNDER EMBARGO UNTIL 07.00 GMT, WEDNESDAY, 6 AUGUST 2014

UNDER EMBARGO UNTIL 07.00 GMT, WEDNESDAY, 6 AUGUST 2014
AUSTRALIA
Country briefing notes
Slower economic growth on weak mining investment
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GDP growth slowed to 2.4% in 2013 from 3.6% in 2012. Mining sector investment, which
propelled growth in the past years, has started to wind down.
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Slower economic growth held back employment and wage growth. The unemployment rate rose
to 6% in January 2014, the highest level in a decade.
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Economic growth is likely to remain sluggish at 2.8% in 2014. This is due to falling mining
investments, fiscal restraint and fragile private consumption.
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Commodity exports are set to continue to support the economy, but the outlook is constrained
by a policy shift in China towards domestic demand-led growth, which will soften demand for the
country’s commodities.
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The housing market continued to rebound in recent months, which helped boost dwelling
investments. The sector is likely to strengthen further, but the possibility of an asset bubble
should be monitored closely.
Modest inflation
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The annual inflation rose slightly to 2.4% in 2013, which was within the official target range. The
price rise was partly due to the one-time impact of the introduction of the carbon tax in mid-2012.
The carbon tax was repealed in July 2014 due to pressure from business lobby despite
opposition from environmental activists.
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The depreciation of the Australian dollar in mid-2013 had some inflationary pressures on
tradable goods. But inflation outlook should remain moderate given weak labour market
conditions, which would help contain demand-driven inflation, and recent appreciation of the
currency.
Current account shortfall shrank on strong exports
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The Australian trade balance turned to a surplus in 2013. Despite subdued export prices, high
export volumes of metal ore helped boost export revenues.
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Imports also rose, but only marginally, driven by mining-related capital goods. The current
account deficit thus narrowed to 3.2% of GDP in 2013, from 4.2% of GDP in 2012.
Macroeconomic policy developments
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The budget deficit increased to 2.9% of GDP in 2013, as resource tax revenues declined on the
back of falling commodity prices.
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The proposed large-scale transport infrastructure project in the 2014 Budget should help
improve output in the medium term, as well as budget positions. A sustainable fiscal surplus is
targeted by 2025.
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Monetary policy has been accommodative. At the end of 2013, the policy interest rate stood at
2.5% or 225 basis points lower than the level in October 2011. The policy rate has been left
unchanged so far in 2014.
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The booming mining sector generally led to a stronger currency and therefore weakened
competitiveness in non-resource sectors. The non-resource sectors need to be more
competitive in order to supplement the fall in resources investments. The Reserve Bank of
Australia has recently expressed concerns over strong Australian dollar and is likely to respond
by cutting the policy rate especially when inflation expectations are low.