By Wayne Cole
SYDNEY (Reuters) - Australia's economy is expected to grow at a solid pace over the next couple of years as strength in housing and exports offsets the prolonged drag from an ageing mining boom.
The latest Reuters poll of analysts expect Australia's A$1.6 trillion (888 billion pound) of gross domestic product (GDP) to expand by 3.1 percent in 2014, topping last year's pace of 2.9 percent which was already among the fastest in the developed world.
That was also up from previous forecasts, largely thanks to an exceptional burst of growth in the first quarter as resource exports beat all records.
Growth was seen steadying around 3.0 percent in 2015, extending the run of good fortune for a country that has not suffered a recession in 23 years.
"A key reason for Australia's out performance has been strong demand for hard commodities, particularly from China," said Paul Bloxham, chief economist for Australia at HSBC.
"Now, although mining investment is falling, the ramp-up in resources exports is only just beginning and most of these are destined for Asian markets," he added. "Australia's long pivot towards Asia is far from over and we expect it to continue to support growth."
That trend was clearly evident in stellar output figures from mining giant BHP Billiton this week which showed iron ore production up almost a fifth for the year. The steel making mineral is Australia's single biggest export earner worth almost A$80 billion annually.
Record low interest rates have also been supporting the economy by lifting demand for homes and household wealth, which in turn has spurred a revival in home construction. Starts on new homes hit an all-time high in the first quarter and promises a big spillover effect through consumption and jobs.
NOT WITHOUT RISKS
Yet mining investment is set to fall sharply over the next few years as major projects are completed and there are only tentative signs of a pick up in spending by other businesses.
Many trade-exposed industries have been pressured by the stubborn strength of the local dollar, which has defied all attempts by the Reserve Bank of Australia (RBA) to talk it down.
Consumers have also been keener to save than spend, a habit reinforced by the Liberal National government's warnings that tough steps will have to be taken to fix the budget.
"It seems likely that fiscal restraint will provide a headwind to growth in coming quarters," said Alan Oster, chief economist at National Australia Bank.
"Equally it is hard to judge the impact on growth from unsettled consumers, and the budget may prove to be a slow downside burn."
There was enough uncertainty about the outlook for Oster to predict the RBA would keep interest rates at 2.5 percent until the second half of next year, which would easily be the longest period of stability in modern history.
The scope for further policy easing has been limited somewhat by a gradual pick up in underlying inflation to around 2.8 percent, near the top of the central bank's long term target band of 2 to 3 percent.
Yet most analysts expected inflation pressure to ease in coming months, in part due to subdued wages growth and the government's decision to abolish a tax on carbon.
Median forecasts were for consumer price inflation of 2.8 percent this year, slowing to 2.5 percent in 2015.
(Reporting by Wayne Cole; Editing by Kim Coghill)