According to a prestigious global forecaster, the decrease in China and a tighter federal budget will drive Australia's growth as low as 2 per cent next year, allowing interest rate cuts and a 20 per cent devaluation in the Australian dollar.
Roubini Global Economics, founded by renowned US economist Nouriel 'Dr Doom' Roubini, says slowing Chinese growth will hit commodity prices and Australian export volumes, while domestic consumer and investment weakness will continue to drag on the country's gross domestic product, describing the federal government's fiscal austerity as "poorly timed". The firm sees GDP growth slowing from just below 3 per cent now to 2 per cent for 2015 after ending this year at 2.8 per cent.
Dr Roubini himself earned the "Dr Doom" moniker through consistently bearish analysis, exemplified by his accurate prediction of the 2008 US housing market crash and the global financial crisis that precipitated from it. He founded Roubini Global Economics in 2004.
The insight is by far the most downbeat so far published on Australia, and contrasts with an almost consensus view that the economy, although not robust, is in fairly good shape and should improve throughout next year.
Meanwhile, however, a growing number of economists have begun qualifying their more upbeat view of Australia with warnings about the magnitude of China's credit and property market problems.
"The Australian dollar is likely to weaken to below US75¢ - a fall of around 20 per cent - on a combination of the lower interest rate differential and slumping GDP growth, with commodity price effects outweighing volumes," said Roubini's local analyst David Nowakowski.
"Domestically, mining output is still strong, but investment in the sector is not, and iron ore prices are plummeting," he wrote."Although some easing of China's credit crunch will help Australian exports in the short run, we see lower Chinese growth in 2015 as a headwind that will weaken Australia's growth and inflation next year, and weigh on growth-orientated assets such as equities and the Australian dollar."
Mr Nowakowski said flagging growth and low inflation would create room for the Reserve Bank of Australia to make a "cut or two in interest rates, to 2 per cent".
This would help drive the Australian dollar down as the US Federal Reserve started to lift interest rates, he said.
The local unit was fetching about US89.50¢ in early afternoon trade on Monday, up slightly on the day. After recovering slightly throughout last week, the price of iron more settled down again on Friday at a new five-year low of $US81.70 a tonne.
The bearish Roubini report also identifies Australia's housing boom as "increasingly out of line with fundamentals", including demand for goods and services and the unemployment rate.
