The RBA has just about given up forecasting in its latest Statement on Monetary Policy. It’s cut growth forecasts 0.25% but the real message is the meanderings of the outlook:
GDP growth is expected to be below trend at around 2½ per cent over 2013 before picking up to just under 3 per cent over 2014. These forecasts have been revised down since the November Statement, largely reflecting the slightly weaker outlook for mining and non-mining investment. Overall, the soft outlook over the next year or so reflects a number of factors: 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 pick-up in non-mining business investment.
The downward revisions to business investment for both the mining and non-mining sectors have been concentrated in spending on machinery and equipment. This largely reflects weaker-thanexpected data in the ABS capital expenditure survey, as well as subdued investment intentions reported
in business surveys and the Bank’s liaison. The forecast for investment in buildings and structures in the mining sector has been lowered from mid 2013 onwards, as a range of information suggests that mining investment is likely to peak before the end of this year.Over the past six months, the largest downward revisions to the mining investment profile have been in the coal sector. Despite recent rises, prices for both coking and thermal coal remain more than 20 per cent lower than they were a year ago and most forecasters expect prices to remain relatively subdued over the medium term, with global demand for coal dampened by the increase in natural gas production in the United States. The fall in iron ore prices over the September quarter was reportedly a factor in the delay of some iron ore projects.
Notwithstanding the significant increase in the iron ore price of late, mining company statements indicate that they remain focused on containing costs and it remains difficult to obtain finance for some projects. A small downward revision was also made to the outlookfor investment in the liquefied natural gas sector. This reflects the effect of delays to the construction of some projects, which has been partially offset by changes to the cost of construction.
The outlook for the rest of the economy remains mixed. Growth in public demand is expected to be very subdued over the next two years, as both the Australian and state governments undertake significant fiscal consolidation (although there may be some rebound in the December quarter from the unusually sharp fall in measured public investment in the previous quarter). On the other hand, a gradual recovery in residential construction investment looks to be underway, as lower interest rates, rising rental yields and an improvement in conditions in the established housing market have created a more favourable environment for investment.
The outlook for consumption is little changed from the time of the November Statement. The available data suggest that after growing rapidly early in 2012, consumption grew at a more moderate pace thereafter, in line with slower growth in labour income. Looking ahead, consumption spending is expected to grow a little below trend in the near
Employment growth has remained subdued in recent months, with the unemployment rate drifting gradually higher. Sectors exposed to the mining sector have scaled back their demand for labour and remain focused on minimising costs, while the ongoing fiscal consolidation has weighed on public sector employment. Employment is expected to grow only modestly in the near term, broadly in line with the outlook implied by a range of leading indicators. Employment growth is then expected to pick up gradually, but to remain below the pace of population growth over most of the forecast horizon. Accordingly, unemployment is expected to drift gradually higher.
This is probably wise. There are a remarkable number of uncertainties in the year ahead. It will be quite something to watch.
