Pimco: Australia Needs to Slash Rates To Plug Economic Black Hole

Australia needs to slash interest rates in order to plug an economic black hole that was created from slowing mining activity, say two influential analysts.

According to a research note by the world's biggest bond manager Pacific Invesment Management (Pimco), Australia will have to further reduce record-low interest rates in order to fill a 'physical' and an 'economic' hole that has emerged from slowing mining activity and investments.

'Lower interest rates will likely be required to support domestic demand as Australia transitions away from mining-assisted growth,' said Pimco economists Adam Bowe and Robert Mead in a report published on the company's website.

The Pimco report forced the Australian dollar to shed 0.48% to 95 US cents. The currency has weakened by 7.7% this month.

'After avoiding the worst of the ravages of the global financial crisis with the aid of significant policy stimulus from China that helped boost demand for bulk commodity exports, Australia has so far escaped the clutches of the global the 'New Normal,' added Bowe and Mead.

The phrase 'New Normal' was made popular by Pimco and it refers to the period of poor growth and lower returns in the world economy, following the 2008 financial crisis.

'However, as domestic growth outside the mining sector remains subdued and Australian policy rates appear likely to converge towards their global peers', we believe the New Normal has finally arrived down under.

'Although the return on mining sector investment will surely come over the secular horizon in the form of higher exports, the expected decline in mining investment will likely leave a significant economic hole over the shorter term that will need to be filled,' the report said.

Shipments to China, the world's second largest economy, account for 5% of Australia's GDP. Slowing economic activity in China, which reported surprisingly poor factory activity earlier this month, has dented the demand for Australian commodities.

Mining activity has peaked in Australia as government data showed that A$150 billion ($144bn, €111.7bn, £95.6bn) worth of resources projects have been shelved or pushed back.