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Australia Cuts ‘Speed Limit’

Australia Cuts ‘Speed Limit’Australia Cuts ‘Speed Limit’

Australia’s Treasury lowered its estimate of the economy’s potential growth rate, or speed limit, reflecting weaker population growth and fewer hours worked in an economy adjusting to the end of a commodity-price boom.

The economy’s potential rate will be about 2.75% over the next few years, down from 3% estimated at the time of the budget, Nigel Ray, deputy secretary of treasury and responsible for its macroeconomic group, said in a speech in Sydney Tuesday. The rate is projected to fall further, reaching 2.5% by 2050, as the population ages, he said, Bloomberg reported.

“It is likely that, on average, we won’t have to grow quite so fast” to close the output gap as previously thought, Ray told a forum of economists. “The economy will of course, by definition, still have to grow a bit faster than potential.”

Australia’s population growth has eased as a weakening economy has diminished the country’s appeal to migrants. The central bank has cut interest rates to a record-low 2% to help cope with the unwinding of a decade-long mining boom and support consumption as wage growth slows.

The International Monetary Fund warned in June that the Australian economy’s speed-limit–or the growth rate at which inflation starts to accelerate–could drop from above 3% to 2.5%. The Reserve Bank of Australia and treasury have also indicated in recent months that the potential growth rate was likely lower.

 Soft-Landing

Growth in Australia’s working-age population slowed to 1.5% over the year to June 2015, lower than the budget’s assumption of 1.75%, and is “well below its average yearly growth over the past 10 years,” Ray said.

Treasury will finalize its mid-year economic and budget forecasts following the release of third-quarter gross domestic product next week, Ray said.

Australia is the fourth largest commodity seller as a percentage of GDP. Over 15% of the nation’s GDP comes from exports. Only Russia, Venezuela and Chile are ahead. In the case of the first two, oil makes up a large portion of exports. For non-oil commodities, only Chile exports more than Australia as a percentage of GDP.

China’s slowdown has an impact on Australia.

One story developing now is that China’s slowdown will be gradual. In other words, policymakers will attempt to manage the decline in order to prevent the Aussie economy from crashing. This is the so-called ‘soft landing’. A soft landing equates to GDP growth of 6.5% up to 2020.

Truth is, a soft landing is by no means guaranteed. As hard as China bulls try to convince you otherwise, even a soft landing is a big deal. A soft landing poses bigger problems for Australia than China itself.

Financialtribune.com