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The Australian economy enters 2014 in a relatively soft position.
Economic growth in the year to September 2013 slowed to just 2.3%. Although this continued
Australia's 23 year expansion, economic growth is running well below potential -- which is
closer to 3.25%. Over the past few years, economic growth has
been dominated by investment in the mining sector, which has jumped from around $A10bn
per year a decade ago, to over $A100bn this year.
However, this is now peaking and mining investment will slow over the next few years and alternative
sources of growth need to be found. One of those sources of growth will be exports.
After years of spending money on increasing capacity and productivity, the mining sector
is already experiencing a boom in export volumes -- at still good prices.
In addition, exports like tourism are rising sharply -- most notably with China.
Another source of growth should be found in the housing market.
Low interest rates and increased consumer confidence is seeing demand for houses and
apartments rise strongly, with prices and auction clearance rates up sharply.
But it's important for this increase in demand to be met by an increase in supply of new
homes and apartments. An increase in residential construction activity
will be a critical source of growth for the economy in 2014.
An important part of this development will be a sharp increase in infrastructure spending.
By building new and better modes of transport, including roads and heavy and light rail,
both the Federal and State government's will have a very important role to play in supporting
the economy -- not just in 2014, but for many years to come.
Away from housing and infrastructure, the economy will also need a pick-up in non-mining
capital spending. Unfortunately, to date there is little evidence that this is occurring.
The Reserve Bank is expected to keep the cash rate at its historic low of 2.5% for much
of 2014, while the Aussie dollar could continue to drift lower against a stronger US dollar.
For 2014, therefore, the outlook is for the Australian economy to continue to grow, but
at below average pace. This should be supportive of asset markets,
but with a sense of caution as the local and global economy continues its long recovery
process.