Australia's central bank cut its 2013 growth forecast today.
It warned that the mining boom will peak earlier and at a lower level than expected as weaker commodity prices curb investment plans.
The Reserve Bank of Australia is now predicting annual growth of just under 2.75% for 2013, down from 3% previously.
Growth for 2014 is seen near 3%, little changed from its previous forecast in August.
It kept a benign outlook for prices, but warned that some slowing in wage growth is needed to maintain inflation around its current level. For now, it expects underlying inflation to remain within its 2-3% target over the next two years.
"The outlook for the Australian economy is a little weaker than that presented in the August statement," the RBA said in a 70-page report. Most of the downgrade was due to mining investment, which was expected to "peak a little earlier and at a lower level" than previously thought.
The RBA said a recent sharp fall in spot prices for bulk commodities had led to a change in the spending plans of miners. The RBA also said significant fiscal consolidation at both the Federal and State government levels will take a toll on growth.
Despite the softer outlook, the resource-rich country remained well apart from its developed peers, particularly the euro zone which looked set to stay mired in recession for years.
Having lowered the cash rate by 100 basis points since May, the RBA left it unchanged at 3.25% earlier this week, saying there are signs that past cuts are working and that further effects can be expected over time. But it left the door open for more easing.
The RBA said Australia's growth outlook depends on mining investment as well as "the timing and extent of the anticipated recovery in both dwelling and business investment outside of the resource sector".
"Investment plans of iron ore and coal miners remain dependent upon the prices of bulk commodities, which will in turn depend on the strength and nature of growth in China," it added.
Prices for iron ore, among the country's most valuable exports, skidded to a three-year low under $100 a tonne in September but has since bounced back to around $120. Still, they remain about 35% below their 2011 peak.
Some recovery in bulk commodity prices is expected early next year, "on the expectation that Chinese demand for steel picks up a little," the RBA said. "But further out, prices are expected to continue to decline gradually given the expansion in supply generated by the very high levels of resource investment globally," it said.
While mining investment has continued to grow rapidly in recent quarters, the RBA said the peak could come as soon as next year.
On Chinese growth, the central bank said the near-term risks looked to have declined, but uncertainty regarding the policy outlook persisted.
Outside the non-resources sector, the RBA said private non-residential investment is still subdued although demand for credit from businesses has picked up over the past year due to lower borrowing costs. It also noted that leading indicators of labour demand have declined further over recent months and point to only modest near-term employment growth and to the unemployment rate edging a little higher.
The RBA said the outlook for inflation depends on whether soft demand in some parts of the economy can help contain domestic cost pressures, now that the effects of the earlier rise in the Australian dollar have waned.
"Some slowing in wage growth is likely to be necessary to maintain inflation around its current rate. Further growth of productivity will also be needed to keep inflation consistent with the medium-term inflation target," it warned.
