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POLL-Australia economy struggling to fill the hole left by mining

Wayne Cole
Friday, 24 Jan 2014 | 2:00 AM ET

* Economy seen growing 2.8 pct in 2014, 3.0 pct in 2015

* Inflation seen at 2.5 pct in both 2014, 2015

* For poll results, click on

SYDNEY, Jan 24 (Reuters) - Australia's economy faces another year of substandard growth as it struggles to find new engines of activity to drive it over the hump of an historic mining boom.

The latest Reuters poll of analysts expect Australia's A$1.5 trillion of gross domestic product (GDP) to expand by 2.8 percent in 2014, up from an estimated 2.4 percent last year and a tick higher that in the previous poll in October.

Growth was seen picking up further to 3.0 percent in 2015, though that would still be short of the 3.25-3.5 percent pace considered "normal". Twenty-two years without recession has turned Australia into the world's 12th largest economy and bred high expectations among its 23 million inhabitants.

"The rebalancing of growth away from the largest mining investment cycle in history will continue to be difficult as non-mining sectors remain reluctant to respond to accommodative monetary policy," says Saul Eslake, an economist at Bank of America Merrill Lynch.

Resource investment has more than tripled in the last decade to approach 8 percent of GDP but is certain to decline over the next two to three years, leaving a big hole to fill.

The Reserve Bank of Australia (RBA) cut interest rates to a record low of 2.5 percent last year in an effort to stoke domestic demand. There are signs this policy is gaining traction in some sectors, notably housing and retail spending.

Yet a disappointingly weak labour market and anaemic growth in household incomes suggest the consumer alone cannot be relied on to get the economy out of its rut.

Neither have firms shown much urge to pick up the baton from mining by expanding their investment. A high cost base, plenty of spare capacity and a lack of scale in the domestic market are all impediments to industry.

The newly elected Liberal National government is also seeking to tighten its belt as it juggles expensive elections promises and a shortfall of tax revenue. While there has been much talk of the need for more infrastructure spending, paying for it will be problematic.

EXPORT BOOM UNDERWAY

One major positive is that the many billions spent on expanding resource production is fuelling a rapid rise in export volumes, from coal to iron ore and liquefied natural gas.

Much of this has been swallowed up by China. In the year to November Australia exported a record A$92 billion ($80.8 billion) of goods to the Asian giant, a quarter higher than the previous 12 months.

At the same time, imports of capital goods are declining as mining projects are completed, so fattening the nation's trade account. As a result, net exports accounted for fully 1.6 percentage points of the 2.3 percent growth achieved in the year to September 2013.

And this sea change has a lot further to run with Australia set to become the world's largest exporter of LNG by 2017 as more projects come on line.

Helping has been a 14 percent fall in the Australian dollar over the past nine months or so. Not only does the lower currency make domestic firms more competitive, but it also provides a windfall to miners' profits as much of Australia's resource exports are priced in U.S. dollars.

Unfortunately the drop in the currency is also lifting import prices and adding to inflation pressures. It was a major reason that inflation for the fourth quarter of last year outstripped expectations to rise an annual 2.7 percent.

Even core measures of inflation showed a worrying acceleration, suggesting analysts were too optimistic in forecasting only a modest pick up in inflation to 2.5 percent over 2014 and 2015.

All of which makes it much harder for the RBA to cut interest rates again or to rely on a further fall in the currency to support demand.

($1 = 1.1388 Australian dollars)

(Reporting by Wayne Cole; Editing by Kim Coghill)