Australia's transition continues
The Australian economy is still experiencing a very challenging transition with the end of the mining investment boom. Australia’s economic growth has been modest with real GDP expanding by only 2.3% for the year to March 2015. The NAB Business and Melbourne Institute Consumer Sentiment surveys have displayed subdued readings this year.
The Reserve Bank of Australia (RBA) has responded to this milder economic activity by lowering the cash interest rate to a historical low of 2.0%, where it has been since May 2015. The RBA justified the interest rate cuts given the expected weakness in business capital expenditure in both the mining and non-mining sectors over the coming year. It judged that the Australian economy is therefore likely to be operating with a degree of spare capacity for some time yet.
Low interest rates, rising wealth and solid population growth should support consumer spending and housing. Non-mining investment should gradually rise and serve as a counterweight to falling mining investment. Mild price pressures from the falling Australian dollar in 2014 and early 2015 should ensure that headline inflation edges back to the mid-point of the RBA’s 2% to 3% inflation target by the end of 2015.
Low interest rates, rising wealth and solid population growth should support consumer spending and housing.
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