The combination of weaker demand and falling terms of trade would show through in rising Australian unemployment, Forsyth Barr broker Peter Young said yesterday.
The Australian economy was facing a weak outlook as the fall in mining investment worked its way through the economy at the same time as fiscal consolidation was under way.
The improvement in savings since the global financial crisis was expected to decline but that would only offset the starting point of a softer labour market, a low level of consumer sentiment and falling wages, Mr Young said.
Although the Reserve Bank of Australia responded to the weakness with a surprise cut in its official lending rate to 2.25%, the Australian economy had not stalled and the shock of sharply lower commodity prices was gradually being absorbed.
At the same time, lower energy prices and a weaker Australian dollar were supporting key labour-intensive sectors in the economy, he said.
The housing market had been a beneficiary of historically low interest rates and the sector was expected to continue expanding.
Housing starts were expected to increase by 20,000 over the next 12 months - a fifth of the number expected in the United States, which has an economy 10 times larger.
House lending had been buoyant over the past year and it was likely the RBA would resort to macroprudential tools, such as restrictions on investment lending, to help control the risk, Mr Young said.
This week's rate cut was likely to be followed by another in March, he said.
The outcome would be a continued flow of capital into higher-yielding dividend stocks and real assets as returns from fixed income dried up.
''The rate cuts should accelerate Australia's economic recovery which, 12 months or so down the track, will pose the counter-risk of a more aggressive tightening response, should global growth pick up sufficiently.''
