Boston, MA -- (SBWIRE) -- 10/03/2013 -- Core Views

Recent economic data releases suggest that the slowdown in economic activity in Australia is becoming increasingly evident. We maintain our outlook for real GDP growth to come in at a sombre pace of 2.1% in 2013, as the mining industry pares back its investments weighed down by high costs and the weakening Chinese economy dims the industry's profit outlook.

We believe that the housing market remains precarious, as affordability of home continue to edge to new lows. Given our poor outlook for the Australian job market in 2013, in which we forecast unemployment to reach 6.0% 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 ruling Australian Labor Party (ALP) barely clings on to its parliamentary majority and the party's austerity stance has unravelled, slowly but surely. We believe that the party will try to introduce more populist policies in an effort to consolidate support for the ALP, but expect that the increasingly hostile environment against debt to restrain the government's expenditures. Federal elections are set to be held on September 7.

We forecast the Reserve Bank of Australia (RBA) to hand out another 25 basis points worth of cuts, bringing the cash rate to 2.25% by end-2013, but have highlighted the growing risk that the central bank could cut more as we expect economic slowdown to be far deeper than the RBA's current estimates. We believe that central bank will continue to attempt to stave off a decline in credit growth by easy monetary conditions further.

Major Forecast Changes

In June, we revised down our interest rate forecast, down from 2.50% to 2.25% by end-2013, expecting the RBA to deliver to a total of 75 basis points over the year. With the Chinese authorities readying to deliver their mini-stimulus of CNY500bn, the likelihood of a near-term bounce in economic activity is increasing, but we do not expect any improvements to persist to Q413, and expect the central bank to come under pressure to deliver the final 25 basis points worth of cuts then.

Fiscal balances have progressively deteriorated, with the latest unveiling of the pre-election economic and fiscal outlook expecting the deficit in FY2013/14 to widen from its original estimates of AUD13.5bn. While we have not made changes to our forecasts given the lack of costing details for the plans for both the ruling ALP and opposition coalition have put forth during this election race, a sharper deterioration of fiscal balance in the near-term looks increasingly likely. This could worsen further as state governments too, are increasingly facing weaker revenue flows.

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