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A slowdown in Australia, but is it time for central bank to cut rates?


Sydney Harbour

Sydney Harbour

Sydney Harbour

When you get older, work less efficiently and have fewer new arrivals, sometimes it's best to accept it.

That could be the Australian central bank's conclusion as it considers how hard to push the economy.

Debate is intensifying Down Under on whether potential growth is lower than earlier thought, which would help explain a stabilising labour market.

A reduced speed limit from the Royal Bank of Australia (RBA) would ease pressure to cut interest rates already sitting at a record-low 2pc.

Traders and most economists predict no change at tomorrow's board meeting.

Having failed to expand faster than 3pc for six of the past seven years, RBA Governor Glenn Stevens last month raised the prospect of whether the economy may be more suited to growth of less than 3pc. The central bank updates quarterly forecasts on Friday and could downgrade expectations for inflation and economic activity over its three-year horizon.

"The grim reality is that the Australian economy has not expanded at around the 3.25pc market in a sustained fashion since 2008," said Michael Blythe, chief economist at Commonwealth Bank of Australia, the nation's biggest lender.

"Lower potential growth means less need for additional policy stimulus and higher risks in overstimulating the economy."

Keeping a lid on economic expansion is Australia's slowing population growth, which in 2015 is likely to be the weakest in nine years as potential immigrants - including from here - look elsewhere.

At the same time, the country's productivity growth has slowed over the last decade as rising incomes from commodity exports meant innovation took a back seat, according to Blythe.

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A lower potential growth rate also means the government will struggle to restore its budget to surplus, which it may need to do to hang on to its AAA sovereign rating.

At the same time, lower potential growth rate "could explain at least a big part of the recent labour-market puzzle, where the unemployment rate has remained stable over the past six months, or even edged lower, despite the slowdown in economic growth," said Paul Dales, chief Australia and New Zealand economist at Capital Economics.

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