Trouble Ahead for Australia's Economy

Opera House in Sydney, Australia.
Maisant Ludovic | | Getty Images

Australia's resource-blessed economy grew a moderate 0.5 percent last quarter thanks to a fresh burst of business investment, but lower export revenues, government cutbacks and a cresting mining boom mean tougher times may lie ahead.

The local dollar held firm after the Australian Bureau of statistics reported gross domestic product (GDP) rose 0.5 percent compared to the second quarter, when it grew 0.6 percent. That was pretty much in line with market forecasts.

The value of all goods and services produced was 3.1 percent higher than in the third quarter of last year at an inflation-adjusted A$369.5 billion ($386 billion).

That remained a faster pace of growth than almost any other developed nation, but analysts suspect a slowdown will be hard to avoid next year.

"Australian economic growth is expected to decelerate in 2013, as the pace of growth in business investment slows and the combined influences of cautious consumer spending and a fragile world economy take a firmer hold," said Stephen Halmarick, as chairman of the association of Australian Business Economists.

They see the economy expanding by around 2.8 percent in 2013, though much uncertainty surrounds that forecast.

Policy makers are only too aware of the risks ahead which is why the Reserve Bank of Australia (RBA) cut interest rates to a record-matching low of 3 percent on Tuesday.

Investors suspect further easing will be needed to offset a profusion of headwinds, from a falling terms of trade to a high local dollar and a penny-pinching government.

Crucially Australia's seven-year old boom in mining investment is likely to finally peak in 2013 and the rest of the economy is not yet ready to pick up the slack.

Retail spending is sluggish, credit growth is the slowest in decades and the housing industry moribund. Abroad, demand for Australia's commodities remains hostage to the slowdown in China, its single biggest customer, while the U.S. fiscal cliff overshadows sentiment globally.

As a result markets imply a 60 percent probability that the RBA will ease again in February, and have rates of 2.5 percent priced in for the middle of next year.