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UNDER EMBARGO UNTIL 07.00 GMT, WEDNESDAY, 6 AUGUST 2014 AUSTRALIA Country briefing notes Slower economic growth on weak mining investment • 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. • Slower economic growth held back employment and wage growth. The unemployment rate rose to 6% in January 2014, the highest level in a decade. • 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. • 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. • 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 • 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 The carbon tax was repealed in July 2014 due to pressure from business lobby despite opposition from environmental activists. • 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 • The Australian trade balance turned to a surplus in 2013. Despite subdued export prices, high export volumes of metal ore helped boost export revenues. • 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 • The budget deficit increased to 2.9% of GDP in 2013, as resource tax revenues declined on the back of falling commodity prices. • 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. • 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. • 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.