A warning from Bank of America Merrill Lynch has today said the Australian economy will struggle to rebalance away from the the mining investment boom.
The long-term strength of the Australian dollar has today been called into question by Bank of America Merrill Lynch.
Analyst Alex Joiner tells clients that the rebalancing of economic growth away from mining investment to other components of domestic demand in the Australian economy has been stubbornly slow to occur.
This comes despite the best efforts of the RBA to ease monetary policy and facilitate the transition.
The RBA had cut rates 150bp from November 2011 to October 2012.
And it was a this latter point it first mentioned in its communications that:
“Looking ahead, the peak in resource investment is likely to occur next year, and may be at a lower level than earlier expected.
"As this peak approaches it will be important that the forecast strengthening in some other components of demand starts to occur.”
Since then it has cut rates a further 75bp to the lowest level on record with still little response from non-mining sectors of the economy.
"Yet now the peak of the mining boom has past its contribution to growth is expected to become much more inconsistent, before indeed contracting significantly," says Joiner.
Bank of America say this will be from a peak of 7% of GDP back towards a longer term average of around 1.5% of GDP over a number of years.
The question remains open as to how well other sectors can fill the gap in growth left by the resources sector.
"If the Australian dollar remains elevated and business confidence does not maintain its post-election bounce we forecast that economic growth in Australia will be below trend for an extended period," says Joiner.
Bank of America forecast Australian economic growth of 2.4%, 2.4% and 2.1% GDP growth for the years 2013, 2014 and
This is as the economy rebalances back from a period of relatively high private investment, peaking at around 18% of GDP, to one at more normal levels at around 13% of GDP.
A period of softer growth is likely simply because this level of investment cannot be sustained at such high levels indefinitely.
"As such our forecasts are predicated on best policymakers being able only to partially offset some of this
potential 5% of GDP decline in the economy that will occur over coming years," says Joiner.