HSBC expects Australian economic growth to pick up to 3.2 per cent in 2018, but if wages growth and inflation remain at low levels the numbers could be much worse.
In his contribution to HSBC's latest Asian Economics report, the bank's Australian economist Paul Bloxham predicted overall growth would run at "above-trend" pace for next few years.
HSBC is expecting Australian GDP growth to pick up from 2.4 per cent in 2017 to 3.2 per cent in 2018, and 2.8 per cent in 2019.
The driving factor is the stabilisation of mining investment, which is likely to more than offset the cooling off of the housing construction boom, Mr Bloxham said.
However, a key risk for HSBC's GDP outlook is that wages growth and inflation will remain low for longer than expected.
Australian jobs growth is running at a decade-high of 3 per cent year-on-year and the unemployment rate is sitting at 5.4 per cent (which is only slightly above Australia's 'full employment' level, which is around the 5-5.25 per cent mark).
The ABS September quarter consumer price index was 1.8 per cent, below the RBA's target of 2-3 per cent.
Mr Bloxham said that structural factors, such as technology and globalisation, are also weighing on wages growth and inflation.
"A key risk to our central forecast is that wages growth and inflation could remain sluggish for longer than we expect," Mr Bloxham said.
"This could occur if the effect of the cyclical lift in the economy and tightening of the labour market on wages growth and inflation are offset by the structural factors, such as offshoring, the changing nature of work and increased retail competition, to a greater degree than we are currently assuming."
Further risks to HSBC's growth predictions for the Australian economy are the cooling of the housing market and the ramp up in household debt levels, Mr Bloxham said.
"Finally, Australia’s positive growth outlook remains highly dependent on ongoing strong growth in China. In particular, any pullback in Chinese household demand for Australian services, such as tourism and education, would present a considerable challenge to our growth forecasts," he said.