Why 2016 will be a tougher year for the Aussie economy

Australia’s challenge of making up for unwinding mining investment with expansion in other industries is going to get tougher in 2016, Goldman Sachs says, even as it forecast the central bank would keep interest rates steady.

Unemployment will climb to 6.25 percent in the middle of next year and annual economic growth will slow to 2 percent from an estimated 2.2 percent in 2015, Goldman economists led by Tim Toohey said in a report Friday.

He reckons the currency will hover in a range between 66 U.S. cents and 72 U.S. cents.

Also read: What lies ahead for Australia's economy?

“The path of the Australian dollar will prove influential in shaping expectations for interest rates,” Toohey said, ascribing a 45 percent chance of a rate cut in the first half of next year.

“We expect that the RBA will leave interest rates on hold in 2016 and 2017 before commencing a modest interest-rate hiking cycle in early 2018.”

The Reserve Bank of Australia cut rates twice this year to a record-low 2 percent, and Governor Glenn Stevens said last week that while there are better prospects for the economy to improve, low inflation provided scope to ease further if needed.

Since then, data has shown the economy grew 2.5 percent in the third quarter from a year earlier and the country recorded its biggest back-to-back monthly jobs gain in almost 28 years.

Australia is grappling with fallout from plunging prices of its commodity exports including iron ore as key trading partner China’s economy slows.

Toohey said falling mining investment will subtract 2 percentage points from economic growth in 2016, compared with an estimated 1.5 percentage points subtraction in 2015, while housing will add nothing next year after contributing an estimated 0.4 percentage point this year.

Also read: Why Australia is not recession-bound

Net exports are predicted to contribute a record 2 points to growth in 2016, up from 0.8 point this year, he said.

“In short, we continue to be well below consensus for economic growth in 2016 and anticipate low interest rates for longer as the familiar threats of the commodity price income shock, rapidly falling business investment and the challenge of addressing Australia’s deteriorating fiscal position weigh on economic growth,” Toohey said.