Economy

Australia headed into perfect storm in 2015

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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.

Read MoreAustralia's economy slows in Q3

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.

Weak Australia GDP sparks rate cut talk
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Weak Australia GDP sparks rate cut talk

"This GDP result concurs broadly with the perceived wisdom on the Australian economy, albeit with perhaps a little more domestic weakness than expected, said David de Garis, director and senior economist at National Australia Bank.

"Investment is weakening as major mining projects complete, while an extended terms of trade fall is driving weakness in real domestic income," de Garis said.

RBA's next move

As Australia navigates a tricky rebalancing act, Goldman expects the Reserve Bank of Australia (RBA) to stand pat on monetary policy until March 2016, when it forecasts the central bank will commence raising interest rates.

The bank previously expected the RBA to hike rates by 25 basis points in the fourth quarter of 2015.

Read MoreAustralia holds rates as speculation for cuts mounts

The central bank on Tuesday kept rates at a record-low 2.5 percent, and maintained its rhetoric for a period of stability for rates.

However, some economists believe weak growth, slowing inflation and a rising jobless rate could pressure the RBA to ease monetary policy further.

Earlier this week, Deutsche Bank released a report titled "Australia: Change of Call," which predicts the RBA will cut rates by 50 basis points to 2 percent next year, a shift from its earlier stance of no change.

Read MoreWhy RBA's move to cool housing could backfire

In this environment, the beleaguered Australian dollar is expected to remain on its downtrend.

Goldman expects the currency to fall to $0.86, $0.85 and $0.82 on 3, 6 and 12-month views, respectively, from $0.84 currently.

Meanwhile, the country's stock market is poised for moderate gains.

The benchmark ASX-200, among the worst performing markets this year, is forecast to rise 9 percent to 5,700 by end 2015, according to the bank.