Australia is heading towards a "construction cliff" as the mining investment boom fades. But it doesn't mean the economy will slump into recession, an independent forecaster says.
Deloitte Access Economics economist Chris Richardson believes coal and iron ore prices would need to fall a lot more for economic growth to go backwards.
"If commodity price falls slow, then national income growth will get a second wind," he said in the forecaster's June quarter business outlook released on Monday.
The recent depreciation in the Australian dollar will also be supportive, Mr Richardson said.
Annual national income growth fell to just $49 billion in the past year, after peaking at $115 billion in early 2011.
However, the loss of construction spending will also mean fewer imports, while less-than-threatening inflation means the Reserve Bank of Australia (RBA) can focus its "firepower" on getting a better growth outcome, he said.
"Given the size of the 'construction cliff' that this nation is facing, that implies interest rates will stay lower for longer than many realise," Mr Richardson said.
He believes the central bank has the motive and opportunity to move interest rates even lower.
The cash rate has been at an all time low of 2.75 per cent since May.
However, despite these positives, the challenges are "large and lingering" and enough to keep output growth below three per cent, a long term trend through to mid-2015, he said.
After surging by 14.7 per cent in 2012/13, the forecaster expects construction - non-residential building and engineering combined - to drop 4.9 per cent in 2013/14, 6.6 per cent in 2014/15 and 3.1 per cent in 2015/16, before flattening thereafter.
Official inflation data for the June quarter will be released on Wednesday. But this is the least of Australia's worries at the moment, Mr Richardson said.
He points to weaker economic growth, a lack of pricing power among firms and slower wages growth for a benign inflation outlook.
"Add in some better news on productivity growth and labour costs don't signal developing price pressures," he said.
A lower Australian dollar may add to import prices in the next few years but that "potential problem is not large", he said.
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