Friday, May 8, 2015

Transition out of mining boom taking longer than expected, Reserve Bank warns

It has been a recurring theme of Reserve Bank commentary and official statements over the past two years.

But today, the signals about the economy's transition away from the mining investment boom took on a graver and perhaps more frustrated tone.

The RBA is now warning that the successful move out of the fast fading mining investment boom is taking much longer than expected in the previous February statement.

Underscoring the challenges, the central bank's quarterly statement on monetary policy says a "significant" pickup in non-mining investment appears unlikely over the next year or so.

The sluggish switch away from resource investment is being cited by the RBA as a key reason that kept economic growth at below trend pace in the first three months of this year.

The RBA has slightly downgraded its economic growth prospects to 2 percent in June from a forecast peak of 2.25 percent made in February.

The RBA also cautions that business is not stepping up to fill the gap left from the tapering off of the mining boom.

"Business investment remains a significant source of uncertainty," the RBA says.

"There are also significant risks to the forecasts for non mining investment" and that the latest capital expenditure survey "implies a weaker profile for non-mining business investment over the next year than currently forecast".

In addition to being frustrated about the high Australian dollar despite recent rate cuts, the RBA is also more pessimistic about the direction of the labour market.

The RBA now believes the jobless rate will peak at 6.5 percent in mid-2016 and remain elevated for some time.

The challenges are immense given an uncertain global outlook with the slowdown in China cited as a potential risk as its property market a source of weakness.

The resulting lower demand for steel and other construction products could further impact demand for Australian iron ore and put more pressure on Joe Hockey's budget.