One by one, the international investment community’s love affair with the Australian ‘miracle economy’ appears to be coming to an end.
The latest salvo comes from the world’s biggest bond manager, PIMCO, which has published an interesting report supporting MacroBusiness’ warnings of a big hit to Australia’s growth as the mining investment boom unwinds, as well as forecasting significant further cuts to interest rates as the RBA attempts (in vein) to support growth in the non-mining economy.
From PIMCO’s “Filling the hole we have dug” report (h/t Mav):
With mining investment contributing over 60% of the growth in real GDP last year, policymakers need to ensure that more is left than just a very big hole – both physically and economically – as the peak of the mining investment wave passes over this year…
In 2012, engineering construction, which is primarily mining investment, contributed 1.9% to total real GDP growth of 3.1% (Figure 1)…
The peak in mining investment comes as Australia’s economy already faces a significant challenge. On the nominal side, the end of the boom in bulk commodity prices has put pressure on the terms of trade, which is likely to continue as China’s growth moderates and Chinese policymakers attempt to transform their growth model away from infrastructure investment towards consumption. This will continue to put pressure on Australia’s national income growth – already at low levels rarely seen outside recessions (Figure 2)…
Although a 2.75% cash rate looks exceptionally low relative to Australia’s historical experience, it still leaves the RBA with plenty of firepower to combat a slowdown in the domestic economy. To stimulate some of the domestic growth candidates like non-mining business investment, household consumption and housing construction, we believe the RBA will need to provide meaningfully easy policy rates…
