The Reserve Bank will have to consider up to two more rate cuts in the new year to help deliver a "circuit-breaker" to a weak economy, one of the nation's most prominent economists has predicted.
Westpac chief economist Bill Evans, who warned real incomes across WA were falling as steam came out of the mining sector, said the next two years look tough especially if the Federal Government undertakes deep spending cuts.
Financial markets and most analysts believe the Reserve Bank has finished with cutting rates, which sit at an equal 54-year low of 2.5 per cent.
But Mr Evans, who defied accepted wisdom in 2011 to successfully predict deep cuts in official rates, believes the economic headwinds facing Australia and the tepid response to current interest rate settings were being ignored. While mining exports would make up some of the shortfall caused by the slowdown in mining construction over the next 18 months, it was not enough to buoy the economy.
Businesses were holding back on investment plans and employment, focusing more on protecting profits by cutting working hours and keeping a lid on wages.
A boost in confidence that accompanied the election of the Abbott Government had run out of steam while the housing sector, though improving, was not responding rapidly enough to low rates.
"Until there is some circuit-breaker in the Australian economy which will encourage businesses to invest and employ, growth is likely to remain below potential," Mr Evans said.
Westpac believes the economy will grow about 2.5 per cent a year over, pushing unemployment up to 6.5 per cent.
Mr Evans said the Government, which could help support the economy, was likely to move in the opposite direction.
A tightening of fiscal policy in the May Budget would undermine confidence and incomes.
There is also concern about the WA economy, with Westpac expecting the recent lift in Perth house prices to slow through the coming year.
Real incomes, which have soared more than a third over recent years, are likely to fall.
This would then feed into the retail sector which, after leading the nation at the start of the year, is the slowest.
'Growth is likely to remain below potential.'" Economist *Bill Evans *