2014 a ‘litmus test’ for Australia economy: Goldman

Australia – often referred to as the "lucky country" for its wealth of natural resources – will face a litmus test this year as the economy continues to transition from its reliance on commodities towards broader-based growth, Goldman Sachs said.

"2014 will be the litmus test for the Australian economy. Hopes appear high that the asset price gains of 2013 will transition into accelerating final demand growth in 2014," Tim Toohey, head of Economics, Commodities and Strategy (ECS) Research, Australia and New Zealand at Goldman Sachs wrote in a report on Monday.

"Expectations for better U.S.-led developed market economic growth, a clear turn in housing activity and easy domestic financial conditions, a consensus has formed across the economics community and financial markets that a recovery has commenced in Australia," Toohey added.

(Read more: End of boom? Not for Australia's iron ore miners)

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But Goldman Sachs is less upbeat about its outlook for the economy, forecasting a slowdown in growth to 2 percent in 2014 – below an expected 2.5 percent in 2013 and consensus estimates of 2.7 percent this year.

As a result, it believes interest rate cuts by the Reserve Bank of Australia (RBA) are more likely than hikes this year. The bank's base case is for a 25 basis point rate cut in March.

The country's cash rate currently stands at a record low of 2.5 percent. The central bank has cut rates eight times since November 2011.

(Read more: RBA says low rates working, won't rule out more cuts)