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Will Lady Luck Return to Australia This Year?

Tuesday, 15 Jan 2013 | 12:13 AM ET
Michele Galli | E+ | Getty Images

Australia's performance in 2013 depends on how well it can rebalance its economy away from mining-led growth, say experts.

Often called the "lucky country" because of its rich natural resources, Australia's growth has long been funded by the commodities boom but now, economists say, there are a few other bright spots that could pick up where mining left off.

(Read more: Are Australia's Days as the 'Lucky Country' Numbered?)

A recovery in domestic sectors like housing and consumption should be able to keep Australia on track for about 3 percent gross domestic product (GDP) growth this year, close to the forecasted 3.5 percent annual growth for calendar year 2012, Paul Bloxham, chief economist for Australia and New Zealand at HSBC said.

"Australia will pull off a great rebalancing act and shift from being very mining led to being more driven by other sectors of the economy," said Bloxham, adding that record low interest rates will provide support the housing and retail markets need to pick up the slack.

Michael Blythe, chief economist at Commonwealth Bank of Australia also expects a boost in housing construction as resources from mining construction become free, following a drop in investment.

"If we get the residential sector moving, that will be a big positive for this growth transition," Blythe said.

The Reserve Bank of Australia (RBA) expects mining investments to peak at 8 to 9 percent of GDP within the next two years, earlier than expected, and as a result has cut its growth forecast for this year to about 2.75 percent.

Concerns about how Australia would rebalance its two-speed economy - characterized by faster growth in one sector over others - were heightened in the second half of last year when third quarter gross domestic product growth of 0.5 percent was its slowest in a year-and-a-half as the mining boom began to peter out.

(Read more: Trouble Ahead for Australia's Economy)

Experts had begun sounding the alarm last year about the end of the country's seven-year boom in mining investment, after several major Australian miners started putting projects on hold amid declining profits.

Since then, however, there has been evidence that the RBA's moves to stimulate the economy with back-to-back interest rates cuts in November and December to a record low of 3 percent, set during the global financial crisis, are starting to have an impact, according to Blythe.

"There has been an increase in housing lending for example. There's been an increase in residential building approvals," Blythe said. "The retail side of things is obviously very soft still, but consumer spending overall is holding up… if you look at other areas – spending on motor vehicles is running at record highs, spending on overseas holidays is at record highs as well."

Sales of new homes in Australia rose almost 5 percent in November – a second straight month of gains - as falling mortgage rates bolstered demand for detached homes, according to a Housing Industry Association survey of large builders released last week.

Budget Surplus Unlikely This Fiscal Year: Swan
Wayne Swan, Australian Treasurer and Deputy Prime Minister says it's unlikely the jump in iron prices so far this year is going to lead to a budget surplus in the 2012-2013 fiscal year.

Recent moves by the government like abandoning its goal to achieve a budget surplus by the end of the fiscal year in June, which Australian Treasurer Wayne Swan told CNBC would lessen fiscal pressure on the economy, also show that policymakers are ready to do whatever necessary to boost non-mining growth, economists said.

While inflation, which is currently at 2.2 percent, will probably tick higher in 2013 on the government's easing bias, Kieran Davies, chief economist at Barclays said that Australia is in a good financial position to tackle the concerns.

"When you add on the other advantages that Australia has like pretty good public finances and a very good financial system, then overall the Australian economy remains a quite attractive package," Davies said.

While Australia's economy looks for fresh sectors to lead growth going forward, there is also good news on the commodities front, with prices for some key resources moving higher as demand from one of the largest consumers China picks up.

(Read more: Cold Snap Cuts China Iron Ore Output, May Extend Rally)

What Stands in the Way?

As Australia looks to rebalance its economy, experts say the domestic challenge of low consumer and business sentiment, which is currently putting a dent on spending and hiring plans, could come in the way.

"In a broad sense, we've still got good growth, low inflation, low unemployment and the outlook is relatively favorable because we've got a solid Chinese outlook, however, the main issue that is stopping growth from accelerating even faster is confidence – we have a confidence problem in this country," said Matthew Circosta, economist at Moody's Analytics, who predicts GDP will come down to 2.7 percent in 2013.

Australia's consumer confidence fell in December, unwinding the previous month's gain as households worried about the economy and finances, while business sentiment slumped to its lowest level in more than three years in November, according to a monthly survey by the National Australia Bank.

Blythe of Commonwealth Bank says the unemployment indicator in Australia this year will be important factor to gauge consumer confidence.

"When we look at the surveys what consumers are generally worried about is job security, they all worry that they might lose their job," Blythe said. "So what we need to see is that the Australian labor market remains in very good shape and I think that will slowly turn negative consumer sentiment around and help put that growth shift to the non-mining economy."

Australia's jobless rate dropped to 5.2 percent in November, beating expectations for a second month. The lasted employment figures by the government for December will be released on Thursday.

An improvement in the global economy led by the U.S. and China and stabilization of the euro zone debt crisis in 2013 will improve business confidence in Australia, according Davies of Barclays.

"I think with the world economy looking a bit better, you can get some improvement in local confidence here," Davies said.

- By CNBC.com's Rajeshni Naidu-Ghelani; Follow her on Twitter @RajeshniNaidu