IMF Executive Board Concludes 2010 Article IV Consultation with Australia

Public Information Notice (PIN) No. 10/144
October 28, 2010

Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case. The staff report (use the free Adobe Acrobat Reader to view this pdf file) for the 2010 Article IV Consultation with Australia is also available.

On October 27, 2010, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Australia.1

Background

Despite growth slowing due to the global financial crisis, Australia was one of the few advanced economies to escape recession in 2009. This reflected growing links with Asia, including strong demand for commodities from China and India, a prompt and significant macro policy response to the global crisis, a healthy banking sector, and a flexible exchange rate. The labor market also proved to be flexible in the face of the shock.

With the recovery well on track and dissipating spare capacity, policy stimulus is appropriately being withdrawn. The RBA has raised the policy rate to 4½ percent in six steps, the most recent in May. The increases in the policy rate have flowed through effectively to both mortgage and business lending rates which have returned close to their 10-year averages. As originally planned, the fiscal stimulus is being reduced starting in 2010.

A mining boom is underway, as commodity prices have rebounded and the outlook remains favorable. Real GDP growth is projected at 3–3½ percent in 2010 and 2011, with private investment in mining and commodity exports taking over from public demand as the main driver of growth. The terms of trade is expected to rise to historic highs in late 2010, driving a mining boom that is likely to be long lasting, given increasing ties with fast-growing emerging Asia.

The main risks relate to the global outlook and, in the near term, are tilted largely to the downside. If the global recovery stalls and Chinese demand for commodities declines, Australia’s terms of trade could fall sharply. In addition, concerns about fiscal sustainability in Europe could disrupt global financial markets and push up the cost of capital for Australian borrowers. On the domestic front, a fall in house prices, which Fund staff assesses could be mildly overvalued, and deleveraging by highly indebted households could negatively impact private consumption and slow the recovery. An upside risk is that the mining boom may have a larger-than-expected impact on output and inflation.

Executive Board Assessment

Executive Directors agreed with the thrust of the staff appraisal. They commended the authorities’ decisive policy response on the back of sound fundamentals which, together with strong demand from emerging Asia, cushioned the impact of the global crisis. Australia’s economic prospects are favorable, driven by a mining boom and increasing integration with emerging Asia, although the near-term outlook is somewhat clouded by the uncertain global environment.

Directors welcomed the Reserve Bank of Australia’s (RBA) timely unwinding of monetary stimulus. They noted that if the recovery and economic growth remain on track and downside risks dissipate, monetary policy might need to tighten further to contain inflation pressures. Should the global recovery stall, the RBA has scope to cut the policy rate.

Directors agreed that the pace of exit from fiscal stimulus was appropriate. They commended the authorities’ plan to return to surplus by 2012/13 and noted that there is enough fiscal space to slow the pace of exit or loosen fiscal policy in response to a downside scenario. Directors also noted that the automatic fiscal stabilizers should be allowed to operate fully, given that the growing dependence on mining may amplify the business cycle. This implies running larger budget surpluses during upswings to help avoid potential overheating and build a buffer against a sharp fall in commodity prices.

Directors welcomed the recent review of the tax system, including the introduction of the mineral resource rent tax (MRRT). They stressed the importance of broadening the coverage of the MRRT beyond iron ore and coal. Directors noted that more reliance on consumption-based taxes would allow for the elimination of inefficient state taxes and make room for reductions in personal income taxes, and encouraged the authorities to build consensus toward this end.

Directors welcomed the fact that the Australian banks are sound. They commended the Australian Prudential Regulation Authority’s (APRA) regular stress testing and the authorities’ efforts to improve banks’ own stress testing capabilities and to extend stress testing beyond the banking sector. Directors encouraged continued vigilance to risks in the mortgage sector and close monitoring by APRA of banks’ risk assessments and strategies.

Directors noted the vulnerabilities arising from the projected widening of the current account deficit and sizable short-term external debt. Efforts to raise national saving, including through a return to budget surpluses, would help contain current account deficits. Directors considered that rollover risks associated with short-term external debt could be reduced further by encouraging banks to extend the maturity of their offshore funding.

Directors recognized that the floating exchange rate has served Australia well and provides an important buffer against external vulnerabilities. They noted staff’s assessment that the Australian dollar may be mildly overvalued from a medium-term perspective, while recognizing that the extent of overvaluation is uncertain.


Australia: Selected Economic Indicators, 2007–11

Nominal GDP (2009): $A 1,255 billion (US$996.4 billion)

Quota (in millions): SDR 3,236.40

Unemployment rate (September 2010): 5.1 percent

 
 
  2007 2008 2009 2010 2011
        Proj.
 

Output and demand (percent change)

         

   Real GDP

4.8 2.2 1.2 3.0 3.5

   Total domestic demand

6.8 3.8 0.5 5.4 4.4

      Private consumption

5.2 1.9 1.7 3.3 3.0

      Total investment

9.8 9.0 -1.1 8.4 6.1

      Net exports 1/

-1.6 -1.7 2.0 -2.1 -0.7

Inflation and unemployment (in percent)

         

   CPI inflation

2.3 4.4 1.8 3.0 3.0

   Unemployment rate

4.4 4.2 5.6 5.2 5.1

Saving and investment (in percent of GDP)

         

   Gross national saving

23.1 24.7 23.6 25.7 27.2

      General government saving

5.1 4.1 2.6 2.1 2.8

      Private saving 2/

18.0 20.5 21.0 23.6 24.4

   Gross capital formation

28.9 29.1 28.0 28.2 29.5

Fiscal indicators (cash basis, in percent of GDP) 3/

         

   Receipts

25.0 25.0 23.3 21.9 22.2

   Payments

23.2 23.0 25.2 25.9 24.9

   Underlying cash balance

1.6 1.7 -2.2 -4.2 -2.9

   Fiscal balance (accrual basis)

1.6 1.8 -2.4 -4.1 -2.8

   Net debt

-2.7 -3.8 -1.3 3.3 5.8

Money and credit (end of period)

         

   Interest rate (90-day bill, in percent) 4/

7.2 4.1 4.2 4.3

   Treasury bond yield (10-year, in percent) 4/

6.3 4.0 5.6 5.6

   M3 (percent change) 4/

22.7 14.7 5.8 4.2

   Private domestic credit (percent change) 4/

17.2 7.6 0.8 1.6

Balance of payments (in percent of GDP)

         

   Current account

-6.2 -4.5 -4.4 -2.4 -2.3

      Of which: Trade balance (goods)

-1.8 -0.3 -0.5 1.4 1.6

Terms of trade (percent change)

4.6 14.3 -8.3 18.9 2.0

External assets and liabilities (in percent of GDP)

         

   Net external liabilities

55.9 56.3 61.1 56.9 55.5

   Net external debt

51.7 55.0 51.9 50.0 48.7

   Gross official reserves 4/

2.7 3.8 3.7 3.2 ...

Exchange rate (period average) 4/

         

   U.S. dollar/Australian dollar

0.84 0.85 0.79 0.97

   Trade-weighted index

67.5 66.3 63.2 71.5

   Real effective exchange rate 5/

131.1 128.9 125.6 139.0
 

Sources: Data provided by the Australian authorities; and IMF staff estimates and projections.

1/ Contribution to growth.

2/ Includes public trading enterprises.

3/ Fiscal year ending June 30, Commonwealth Budget. For example, 2011 refers to fiscal year July 1, 2010 to June 30, 2011 which the Australian government’s budget papers denote as budget year 2010.

4/ Data for 2010 are for latest available month.

5/ IMF, Information Notice System index (2000 = 100).


1 Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here: http://www.imf.org/external/np/sec/misc/qualifiers.htm.



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