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Australia to be ‘odd one out’ in 2014: Goldman Sachs

tim phillips photos | Flickr Open | Getty Images

As the global economy continues to recover next year Australia will be left behind, according Goldman Sachs, which tips it as the only developed market likely to see lower growth.

In a portfolio strategy research note published Monday, the global investment bank said they expect the world's 12th largest economy's to expand by 2 percent next year, slower than the consensus expectation of around 2.5 percent and down from 3.8 percent in 2012.

(Read more: Australia keeps rates unchanged at record low)

"Relative to the acceleration forecast in the global economy, in Australia we expect economic growth to decelerate in 2014," the Goldman Sachs analysts said.

With 22 years of consecutive growth Australia was the envy of the developed world, however many analysts have turned bearish on the economy amid a number of worrying headwinds. The most prominent concern has centered on the slowdown in the country's once booming mining sector, caused by declining demand from its major trading partner China. Many worry that Australia's non-mining sectors will not be able to pick up the slack.

Goldman Sachs analysts share the concern. Among headwinds they believe are weighing on the non-mining sectors are an elevated currency, an ongoing fiscal drag, poor labor income dynamics and a decline in trade.

All these factors will make 2014 a difficult year for Australia's economy, they said, as it navigates the air pocket of economic activity between declining business investment and rising mining production from mid-2015 and beyond.

However, while Goldman expects growth to dip below trend in 2014, they said it will pick up to between 3.5 and 4 percent in 2016 and 2017.

(Read more: China could cut short rally in Aussie dollar)

The boost will come from looser monetary policy from the country's central bank in the form of interest rate cuts, they said, combined with the benefits of a rise in housing investment and a weaker currency. Goldman said they expected the Reserve Bank of Australia to act soon, cutting rates in March next year, and again in 2015.

"We expect a...gradual path for RBA rate hikes to the end of 2017 where we forecast the cash rate at 4.5% by December 2017," read the note.

But lower economic growth in 2013 will translate into lower returns for investors, the Goldman note also said.

(Read more: Aussie dollar could tumble 25% by 2016, warns SocGen)

Australia's stock market, which has returned 22 percent year to date, is likely to see lower returns next year at 14 percent. A lower Australian dollar and better growth in other parts of the world economy will help generate 9 percent earnings growth in fiscal year 2014, and 10 percent growth in FY2015, but stretched valuations and poor earnings momentum will limit the room for multiple expansion, the analysts said.

The Aussie dollar traded at $0.9191 on Tuesday, 11.4 percent lower than where it traded at the start of the year.

—By CNBC's Katie Holliday: Follow her on Twitter @hollidaykatie

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