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Australia’s Central Bank Slashes Growth, Inflation Forecasts

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Source: AFP


Australia’s central bank slashed its growth and inflation forecasts Friday, citing sluggish exports due to global turmoil and the robust Australian dollar, which is squeezing local industries.

The Reserve Bank of Australia (RBA) said it expects growth of 2.75 per cent for the 12 months to June 2012, compared with the 3.5 per cent previously forecast, due to the economy performing “weaker than expected”.

Inflation was expected to be 2 per cent over the same period, the RBA said in its quarterly statement on monetary policy, with the consumer price index falling “very sharply” to about 1.5 per cent in the early months of 2012.

It had previously flagged inflation of 2.25 per cent.

“Some components of the economy exceeded expectations while others underperformed over the past year, but overall, economic growth was weaker than expected,” the RBA said.

The bank said weak export growth was the main reason Australia’s economic performance had come in short of expectations, with the bullish local dollar weighing on manufacturing and other industries.

Sluggishness in the global economy because of Europe’s debt problems had also hit exports, with a slower-than-expected recovery from flooding to coal and farming land in 2011 an additional factor.

On the domestic front, the RBA said demand had expanded “by only a little less than was forecast”, with productivity and confidence both muted and employment “barely” growing in the past 12 months.

The dovish outlook comes just days after the bank lowered its official interest rate by 50 basis points to 3.75 per cent due to weaker economic conditions ‒ its largest cut since February 2009.

Canberra in November scaled back its own forecasts to growth of 3.25 per cent for the 2011/12 financial year from 4 per cent predicted last May.

Treasurer Wayne Swan is due to update national forecasts when he hands down the budget next week, but he said the RBA’s figures were roughly in line with the government’s own and showed the economy was in an enviable position.

“The Australian economy is expected to outperform every other major developed economy in the next couple of years,” Swan told reporters.

“We have an unemployment rate of 5.2 per cent, we have growth returning to about trend, we have solid consumption in our economy and we have a record pipeline of investment in the resources sector.”

The Treasurer acknowledged that the economy was lopsided, with mining-related sectors thriving as others were hit by the exchange rate, which is why he said the government was trying to push the budget back into surplus by 2012-13 with aggressive cuts to defence and other spending.

“There’s no doubt that we’ve got to have belt-tightening across the board, returning to surplus is really important,” Swan said.

The RBA forecast growth of between 2.5 and 3.5 per cent for the year to June 2013 and 3-4 per cent for the following 12 months, saying strength in the mining sector would continue to buoy the Australian economy.

Though it had moderated somewhat in recent months, the “near-term risk of a severe contraction” due to a worsening of Europe’s debt woes remained “the most obvious risk to global growth forecasts,” the RBA added.