Australia's economy expected to slowly gather speed over next couple of years as strength in housing, exports offsets drag from maturing mining boom; GDP expected to grow 2.8% in 2014, 3% in 2015, according to Reuters economists poll

Cindy Allen

SYDNEY , April 25, 2014 (Thomson Reuters Corp.) – * Economy seen growing 2.8 pct in 2014, 3.0 pct in 2015

* Inflation forecast at 2.9 pct in 2014, 2.7 pct for 2015

* For poll results, click on

Australia's economy is expected to slowly gather speed over the next couple of years as strength in housing and exports works to offset the drag from a maturing mining boom.

The latest Reuters poll of analysts expect Australia's A$1.5 trillion of gross domestic product (GDP) to expand by 2.8 percent in 2014, matching last year's pace which was among the fastest in the developed world.

Growth was seen picking up further to 3.0 percent in 2015, and nearer the 3.25-3.5 percent level considered acceptable by a country that hasn't suffered a recession in almost 23 years.

Record low interest rates are finally gaining traction by lifting home prices and household wealth, which in turn has spurred a revival in home construction and consumer spending.

Crucially, approvals to build new homes are running at the fastest rate since 1995 and promises a big spillover effect through the economy.

"The upswing in building activity is part of the transition to more growth from the non-mining sectors," said Michael Workman, a senior economist at Commonwealth Bank.

"There will be considerable boosts to materials and labour demand over 2014 and 2015, including parts of retailing such as white goods, furnishings, flooring and hardware."

That boost will be warmly welcomed given mining investment is set to fall sharply over the next few years as major projects are completed.

The Reserve Bank of Australia (RBA) has been encouraged enough to close the door on further cuts in the current 2.5 percent cash rate and signal a long period of policy stability ahead. Investors are now wagering the next move in rates will be up, albeit not until the first half of 2015.

EXPORTS VS THE A$

One less welcome development for policy makers has been the recent rise of the Australian dollar.

After touching a three-and-a-half year trough of $0.8660 in January the currency has since climbed back to $0.9350, making life harder for trade-exposed sectors.

Yet, all the hundreds of billions spent on resources is greatly expanding production and export volumes, particularly of iron ore and coal, so helping local miners take market share from competitors in Brazil and elsewhere.

So successful have they been that Australian exports to China ballooned by 30 percent in the year to February even as economic growth in the Asian giant decelerated.

Net exports accounted for no less than 2.4 percentage points of Australia's GDP growth in 2013 and further substantial contributions are expected over the next few years, a huge turnaround for a country that has long run trade deficits.

"The country shares for Russia, Brazil and India have been flat to falling over the past few years. In contrast, Australia's share of China's imports has been rising strongly," says Scott Haslem, chief economist at UBS.

"This is in part to reflect Australia's lower relative cost and higher quality - and more reliable supply - to which China is substituting toward, as Australia's supply increases."

One potential fly in the ointment had been inflation, which showed a worrying acceleration late in 2013. Fortunately for policymakers, figures out this week showed price pressures moderated in the first quarter and supported the RBA's confidence that inflation will stay consistent with its 2 to 3 percent target band over time.

Most analysts polled tended to agree, though there was not a whole lot of wiggle room given forecasts of 2.9 percent this year and 2.7 percent next year. (Editing by Jacqueline Wong)

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