Australia's economy will undergo a crucial stress test in 2015, faced with a triple whammy from the lagged impact of plunging commodity prices, sharp declines in mining investment and renewed fiscal tightening, says Goldman Sachs.
"The challenges are now widely known…but these challenges still lie mainly ahead for Australia rather than behind," Tim Toohey, chief economist, Australia at Goldman Sachs wrote in a note on Wednesday.
On top of the these headwinds, the economy also needs to contend with tighter financial conditions and lower levels of housing investment, said Toohey, factors that had previously helped to offset the slump in the mining sector.
The bank expects gross domestic product (GDP) growth to average just 2.0 percent next year, down from an estimated 2.9 percent in 2014, as the economy continues to search for new growth drivers.
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The decline in mining investment will continue to be a major drag on the economy, leaving commodity exports and consumption to pick up the slack, the bank said.
Australia's third quarter GDP data published on Wednesday pointed to a sluggish domestic economy, suggesting rebalancing away from mining-driven growth is taking longer than hoped.
The economy expanded 2.7 percent on year in the three months to September, undershooting expectations for growth of 3.1 percent, as construction spending fell while sliding export prices hit incomes.