Australian economic outlook overshadowed by bushfires, drought - Reuters poll

By Wayne Cole

SYDNEY (Reuters) - Analysts have downgraded forecasts for Australia's economic growth this year as the worst bushfires on record undercut already shaky consumer confidence, adding another burden on consumption and offsetting lower interest rates.

Economists polled by Reuters forecast Australia's A$2 trillion (1.06 trillion pounds) of annual gross domestic product (GDP) would expand 1.8% in 2019, down from predictions of 1.9% in the previous poll and 2.7% early last year.

Growth was seen picking up modestly to only 2.3% this year, again down from 2.5% in the previous poll. The outlook for 2021 held at 2.5%, still short of the 2.75% that is considered trend.

The economy was already running at a pedestrian 1.7% pace in the year to September, and that was before massive bushfires began ravaging much of the east and south of the country.

"The negative impact of bushfires is more enduring than other disasters like floods," said Michael Blythe, chief economist at CBA. "The impact is accentuated by the extreme drought conditions weighing on much of the landscape and particularly the agricultural sector.

"Business disruption will see some activities delayed/deferred with a flow-on to sentiment, particularly in regional areas and the tourism industry."

Consumers were already in a miserly mood amid years of sub-par wage growth and record high debt levels, and signs are they curtailed spending even further over Christmas.

Three rate cuts from the Reserve Bank of Australia (RBA) failed to lift consumption, in part because households took the easing as a sign the economy was in deep trouble.

Markets are wagering <0#YIB:> the RBA will have to cut another quarter point by mid-year, leaving rates at an historic low of 0.5%. The Reuters poll said the cut would come this quarter.

One bright spot has been home prices which have swung sharply higher in recent months after two years of downturn. Prices ended 2019 with the largest quarterly increase in a decade, lifting household wealth to a record A$10.9 trillion.

The government has also pledged to spend what it takes to rebuild after the fires, which could support growth as the year progresses.

That was a change of tune for the conservative government of Prime Minister Scott Morrison which had resisted calls for more fiscal stimulus, preferring to stick to a political pledge to deliver budget surpluses instead.

Thankfully there is plenty of scope for stimulus given core inflation is down around 1.6%, having run below the RBA's 2-3 percent target band for more than two years now.

Even after the recent rate cuts, the poll showed analysts expected headline inflation to run at 1.9% for all of this year, before rising only marginally to 2.0% in 2021.

(Reporting by Wayne Cole; polling by Khushboo Mittal and Shaloo Shrivastava; editing by Nick Macfie)