The Reserve Bank of Australia (RBA) issued a quarterly statement on Friday to the effect that economic growth in the country would be pick up over the next couple of years but would face serious challenge from inflation which is expected to increase to 2-3% by the end of 2013.
The expected pickup has been delayed in part due to the hit that the mining industry took thanks to the floods in Queensland. However the where the economy is headed has not changed much over the last three months as per the RBA despite having slashed the economy growth from 3.25% to merely 2% in 2011.
The RBA statement said that the growth over 2011 has been revised downwards due to a slower than expected recovery in coal production and to a lesser extent a downward revision to consumer spending as domestic and international concerns have weighed on sentiment.
The labor market is approaching full employment as per most economists and the RBA may need to raise interest rates to keep inflation on target. The RBA statement said that while these forecasts represent the bank's central scenario, at the global level the risks to economic activity are weighted to the downside.
The Australian dollar was trading at US$1.0391 from US$1.0447 late Friday. Most Australian stocks also went down making the benchmark index head for the largest drop it has seen in the last three years.
Sydney-based Platypus Asset Management Ltd analyst said that it was a panic attack from fear that growth is dropping off a cliff. Prasad Patkar added that there was an expectation that resolution of the U.S. debt- ceiling issue would trigger a relief rally. It looks like everyone forgot about the weakness in the underlying economy he added.
Chris Weston, an institutional dealer at IG Markets in Melbourne said that everyone was rushing for the exit at one time. He said that people were saying they were not bothered about returns any more, they just want to make sure their money was safe. There's really no place to hide at the moment. In this kind of market, the investment case for equities is extremely low.