Friday, February 8, 2013

Reserve Bank downgrades growth forecasts; warns unemployment set to rise

By Business editor Peter Ryan

The Reserve Bank has once again downgraded its growth forecast for the Australian economy while warning that unemployment is likely to rise.

In the its quarterly statement on monetary policy released today, the RBA has also confirmed the government's recently-abandoned pursuit of a budget surplus also weighed on economic growth.

Growth has been revised downwards to 2.5 per cent by June this year after the most recent statement in November flagged an earlier downgrade to 2.75 per cent.

The RBA says the revision was prompted by the slightly weaker outlook for both mining and non-mining investment, signalling that both sides of the two speed economy are slowing.

The statement also underscores the multiple challenges facing the Australian economy.

"Mining investment is expected to peak, both fiscal consolidation and the persistently high level of the Australian dollar will weigh on growth and there is little sign of a near-term pickup in non-mining investment."

The RBA says the weakness has been reflected across the economy with lower spending on machinery and equipment with the biggest downward revision concentrated in the coal sector.

The Reserve Bank flagged in previous statements in the second half of last year that the investment phase of the resources boom would peak earlier than expected.

However, the RBA predicts a recovery in growth to just under 3.0 per cent over 2014 while warning that growth in public demand will be "very subdued" over the next two years as federal and state government cut spending as part of fiscal consolidation.

Today's statement supports yesterday's official employment figures for January which showed unemployment steady at 5.4 per cent but 9,800 ful time jobs replaced by around 20,000 part time and casual positions.

"Employment growth has remained subdued in recent months, with the unemployment rate drifting gradually higher.

"Employment is expected to grow only modestly in the near term but to remain below the pace of population growth in the near future."

The RBA has given few hints on future cuts to the cash rate apart from repeating that the current inflation outlook would "afford scope to ease policy further" and that the current setting of 3.0 per cent remained "appropriate".

However, the RBA has flagged a number of provisos to its forecasts including the likelihood that the United States will avoid the so-called fiscal cliff and that there are no further shocks in the Eurozone crisis.

In a special final section of the statement, the RBA addressed criticism that some forecasts have been wrong, claiming that 70 per cent of the time, the central bank gets it right.