Poll: Australia growth upgraded, but deflation still a danger

By Wayne Cole

SYDNEY (Reuters) – Australia’s economy should handily outpace much of the rich world this year and next, yet the country might still skirt dangerously close to deflation as wages and prices grow at the slowest pace on record.

At first glance, all is well. The latest Reuters poll found analysts expect Australia’s A$1.6 trillion ($1.2 trillion) of gross domestic product (GDP) to expand by 2.9 percent this year, up from 2.6 percent in the April poll.

Growth for 2017 was seen just a whisker lower at 2.8 percent, an impressive feat for a nation that has not suffered a recession since 1991.

The poll upgrade owed much to a strong performance in the first quarter when booming export volumes helped lift annual growth to a surprisingly rapid 3.1 percent.

A decade of massive mining investment has allowed Australia to ship more of everything from iron ore to gold, with China proving a willing buyer despite its apparent slowdown.

Yet the surge in supply has depressed commodity prices, eating into export earnings, profits, wages and tax revenues.

Measures of national income actually fell in the year to March while GDP in current dollars rose at an historically anemic 2.1 percent.

Wage growth has braked hard to its slowest on record, crimping household spending power and contributing to a worrying decline in inflation.

“Tradables inflation continues to be suppressed by intense competitive pressures and price pressures remain muted across a wide range of items,” said ANZ senior economist Jo Masters.

“Moreover, both wages and inflation pressures remain weak globally, even in those economies that are at, or close to, full employment.”

Consumer price figures (CPI) for the second quarter due on July 27 are expected to show underlying inflation at an all-time low of around 1.2 percent, well beneath the Reserve Bank of Australia’s (RBA) long run target band of 2 to 3 percent.

Such an outcome could well force the RBA to cut interest rates to an historic low of 1.5 percent in the third quarter of this year.

Analysts have responded by slashing their forecast for CPI inflation to just 1.3 percent for 2016, down from 1.9 percent in the previous poll and another historically weak result.

Still, they seem optimistic that the country will dodge full-scale deflation, with CPI inflation expected to pick up to 2.2 percent next year.

Indeed, none of the 30 economists predicted a negative reading for the CPI, with the lowest forecast being 1.1 percent for this year and 1.7 percent in 2017.

(Reporting by Wayne Cole; Polling by Shaloo Shrivastava and Khushboo Mittal in Bengaluru; Editing by Jacqueline Wong)