Second quarter growth data will likely paint a grim picture of Australia's economy on Wednesday as it reels under slowing exports and consumption.
Gross domestic product (GDP) growth decelerated to 0.4 percent on quarter, according to a Reuters poll, following a 1.1 percent expansion in the first quarter.
"A slowdown in exports after the first quarter's unsustainable surge is the main driver," Moody's Analytics wrote in a note. "Household consumption also slowed as consumers lost their nerve after the 'tough' federal budget."
In the three months to end-June, the seasonally-adjusted trade deficit was $4.8 billion, compared with an almost $3 billion surplus for the previous quarter, according to the Australian Bureau of Statistics (ABS).
However, some economists believe a soft GDP reading would merely be "smoke without fire."
"A soft or negative Q2 [reading] for GDP will create plenty of headlines. We wouldn't read too much into it though," said National Australia Bank. "[It would follow] a rapid Q1 – so probably best to read these two numbers together."
Furthermore, economic indicators point to stronger conditions in the September quarter, NAB said.
The Westpac/Melbourne Institute consumer sentiment index, for instance, rose 3.8 percent on-month to 98.5 in August as concerns about the tough federal budget unveiled in May - which featured tax increases and spending cuts aimed at erasing a deficit - eased. However, it remained below 100 indicating that pessimists outnumber optimists.
Meanwhile, approvals to build new homes – a reflection of strength in the housing sector - rose 2.5 percent in July, beating forecasts for a rise of 1.5 percent.
The soft patch in Australia's economy will be temporary, Shane Oliver, head of investment strategy and chief economist at AMP Capital said, citing an improvement in recent data.
"There is a high risk of a slight contraction in GDP. Inevitably, this would invite talk of a recession, but…a recession is unlikely," Oliver said.
Re-balancing on track
The transition from mining-based growth to other areas of the economy is on track, say economists.
An expected rise in non-mining investments implies solid growth in 2014-15 despite slowing mining investment, said ANZ.
Australian firms plan to spend A$145.2 billion on business investment in 2014/15, above analysts' estimates of A$142 billion, according to a report by ABS last week. The biggest spending increase was for "other industries," which includes transport, retail and finance; planned spending was up 12 percent on year - a sign of life in investment outside mining.
"This gives us more confidence that the transition to non-mining drivers of growth is occurring and that non-mining activity is likely to continue to strengthen," ANZ said.
The improvement in non-mining investment intentions is an encouraging sign for the Reserve Bank of Australia (RBA).
However, the central bank will likely wait for more concrete evidence of an entrenched non-mining recovery before it considers lifting interest rates, say economists. Australia's official cash rate stands at a record low of 2.5 percent.