Outlook for Australian economy ‘relatively pessimistic’

Although sentiment towards Australia’s economic outlook has improved over recent weeks, it will be short lived, according to one economist.

AllianceBernstein senior economist Guy Bruten said while that sentiment has helped to buoy the Australian dollar, the likelihood of further monetary easing and weakness in the currency still stands.

“Our relatively pessimistic view of Australia’s outlook has been based around two central tenets,” Mr Bruten said.

“First, the downswing in the commodity super cycle will continue to cast a very long shadow, and the adjustment to lower commodity prices is a multi-year affair.

“Second, the so-called ‘rebalancing’ of growth from the mining sector to the non-mining sector will be a rocky path.

“On the first [tenet], the bounce in the iron ore price from below US$50 ($62) per tonne to US$60 ($75) might make for good headlines, but it doesn’t amount to much in the context of the downtrend that has brought this price down from US$180 ($226),” he said.

“And it certainly is not going to spark the same sort of powerful transmission mechanism that was central to the commodity boom phase.”

Speaking about the second tenet, Mr Bruten noted that while employment growth has firmed and the unemployment rate is no longer “shooting higher”, it is largely a reflection of the housing construction upswing.

“Once that upswing starts to top out, the lopsided nature of the ‘rebalancing’ will quickly become apparent,” he said.

Mr Bruten added there is still little sign of enthusiasm for business expansion in non-mining sectors, and a further rise in unemployment seems inevitable.

“For the record, that’s what we expect, and we see no reason to change our big-picture view,” he concluded.

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