Boston, MA -- (ReleaseWire) -- 03/27/2014 -- The Australian economy continues to struggle to stay above water, as domestic demand continues to show signs of weakening. We maintain our downbeat outlook for the economy and the currency, projecting GDP growth to come in at 2.0% for 2014 and the currency to weaken to US$0.82/AUD by the end of the year. For one, the manufacturing sector continues to battle high costs and stiff competition from cheap imports. Secondly, the mining sector could face even greater stress as firms seek to re-evaluate their projects in light of a slowing Chinese economy and weak commodity prices.
We believe that the housing market remains precarious, as affordability of homes continue to edge to new lows. Given our poor outlook for the Australian job market in 2014, in which we forecast unemployment to reach 6.5% by the end of the year, we believe that demand for housing will decline. The overextended household balance sheets further augur the growth in housing-related credit growth. In our opinion, the Australian banking sector is the sector most leveraged on the housing market and we expect that declines in house prices will adversely impact the industry.
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The Liberal-National coalition's popularity has been on the decline since winning the elections in September 2013. Its government remains hampered by a fragmented Senate, which threatens any reform push by the government. The government has also decided to push back the target date on its fiscal surplus, which is in line with our view. Given the federal government's restrained policy-making ability, we believe the state government is likely to step up to the plate and push through reforms at the state level.
We maintain our forecast for the Reserve Bank of Australia (RBA) to hand out another 50 basis points worth of cuts in H214, bringing the cash rate to 2.00% by end-2014, even though the near-term economic outlook has improved. Indeed, we expect that a weak currency will only provide some reprieve against the mining sector slowdown while slow the hollowing of Australia's manufacturing. Thus, we believe that central bank will continue to attempt to stave off a decline in credit growth by easy monetary conditions when price pressures ease.
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