Australia lowers growth forecast as floods hurt economy

Flood waters
Image caption Widespread flooding caused severe damage to resource-rich states in Australia

Australia's central bank has cut its forecast for growth due to a "slower-than-expected" recovery from floods earlier this year.

The Reserve Bank of Australia (RBA) said it expected growth to be 3.25% in 2011, down from its earlier projection of 4.25%.

The central bank added that subdued levels of consumer spending were also hurting growth.

Australia's economy shrank by 1.2% in the first three months of the year.

Two-speed economy

Australia's growth in recent years has been powered by a boom in its resources sector.

Increased demand for its commodities and minerals from emerging economies such as China and India has seen the sector grow rapidly.

However, while the resources sectors has been expanding, domestic demand has been slowing down, giving rise to what analysts have called a two-speed economy.

Data released earlier this week showed that retail sales in Australia fell 0.1% in June, compared with the previous month, the second successive monthly drop.

To make matters worse, the bank said, consumer confidence in the country has fallen to "below-average levels".

The RBA said the difference in pace of growth of various parts of the economy was starting to take a toll.

"There is a large divergence between the mining and related sectors and the rest of the economy," the bank said in a statement.

"The cautious behaviour of households, the unwinding of the fiscal stimulus and the high exchange rate [are] weighing on a number of industries," it added.

Dollar demand

Image caption Retail sales are falling and consumer confidence is "below average"

Australia's robust economic expansion in recent years saw many investors flock to the country in an attempt to cash in on its growth.

As its economy grew, the RBA became one of the first central banks to raise interest rates after the global financial crisis.

The combination of money inflows and higher interest rates increased demand for the Australian dollar, sending the currency to record levels.

Last month, when the currency was at its strongest level, one Australian dollar was equivalent to 1.10 US dollar.

The bank said the strength of the currency was impacting growth in some sectors.

"The high exchange rate is having a significant influence on a number of sectors, including manufacturing, tourism and tertiary education," the RBA said.

A strong currency makes Australian goods more expensive to foreign buyers, hurting the country's manufacturers and exporters.

At the same time, tourists coming into the country get less money when they change their currency into Australian dollars, making holidays more expensive.

The central bank warned the trend of a strong Australian currency was likely to continue, and said companies were already having to rethink the way they do business.

"The high exchange rate is likely to persist and is not just a temporary development," the bank said.

External factors

While a strong currency and falling domestic demand have hurt growth, how the recent global economic developments pan out will have an impact on growth going forward, the central bank said.

A slowing recovery in the US and ongoing debt issues in various parts of Europe have raised concerns about the global economic recovery being derailed.

The RBA said its economic outlook for Australia "incorporates an orderly resolution" of these issues.

However, it said there was a chance that some of these issues "could play out in a disruptive way over the next year or so", which it warned will have a knock-on effect on growth.

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