Australia's economic growth will slow to below 2 per cent next year and unemployment will rise to nearly 7 per cent, says a bleak assessment by Morgan Stanley.

The bank's team of Asia-Pacific researchers warned in a note on Wednesday that the country had failed to make the transition from its dependence on mining-related infrastructure to a more balanced growth model.

Morgan Stanley analysts aren’t yet predicting a recession in Australia but say that policy settings need to be more stimulatory in order to avoid one.

The income impact of this failure had been made worse by declining terms of trade, it said. The housing investment and construction boom had also not yet translated into broader business expansion.

"In our view, the combination of a deeper-than-expected terms of trade shock and the missed opportunity to springboard consumer spirits off the housing recovery leave the near-term growth profile anaemic," Morgan Stanley said.