## cr1844

## Source details

**Canonical URL:** [cr1844](https://www.imf.org/-/media/files/publications/cr/2018/cr1844.pdf)

## Other formats

- [Markdown version](/-/media/files/publications/cr/2018/cr1844.pdf.md)
- [Structured JSON version](/-/media/files/publications/cr/2018/cr1844.pdf.json)

---

### Context
- Protracted adjustment and rebalancing after the end of the large mining boom of the 2000s.
- Exchange rate flexibility and prompt monetary easing moderated adverse demand impacts after 2011.
- Export orientation to dynamic Asia and relatively high population growth supported the adjustment.
- Nominal and real wage growth have declined, contributing to inflation being below the Reserve Bank of Australia’s (RBA’s) target range of 2 to 3 percent since 2014.
- Housing boom produced market imbalances and higher household vulnerabilities:
  - House prices in major eastern capital cities (Melbourne and Sydney) rose sharply.
  - Standard metrics indicate house price overvaluation in the order of 5 to 15 percent at the national level.
  - Household debt ratios are high by international comparison.
  - Commercial banks’ housing exposure is substantial at over 50 percent of total assets.
- Productivity has lagged; policy priorities: secure future productivity growth in a more services-based economy, avoid higher structural unemployment after protracted adjustment, and further reduce gender imbalances in labor force participation.

### Recent developments (Past year)
- Demand and growth:
  - Average quarterly growth over the past year was close to potential, with volatility from weather-related construction disruptions, mining activity and exports.
  - Aggregate demand led by strong public investment growth amid an infrastructure boost and recovery in business investment.
  - Private consumption growth subdued due to weak real income growth; residential investment declined; net exports contributed less to growth.
  - Final demand growth remained strong in non-resource-led States and began to recover in resource-led States.
- Labor market:
  - Employment growth strong in 2017; unemployment dropped to 5.4 percent in the third quarter.
  - Underemployment has declined more recently and tentatively.
  - Annual nominal wage growth remained weak despite declining labor market slack.
  - Statutory national minimum wage increased by 3.3 percent in mid-2017, directly affecting about 20 percent of the employed and indirectly another 5 percent; no discernible impact on aggregate wage statistics yet.
- Prices and inflation:
  - Inflation increased over the past year but remains slightly below the RBA target range of 2-3 percent.
  - Rebound in nontradable inflation largely from one-off utility price increases and higher tobacco excise; tradable inflation declined.
- Current account and terms of trade:
  - Terms of trade improved primarily due to higher world prices for coal and iron ore.
  - Trade balance moved into surplus in the year through 2017Q3.
  - Staff midpoint estimate: current account gap narrowed in 2017 to -0.5 percent of GDP in the 2017 EBA Update.
  - Staff view: exchange rate overvaluation is moderate; some approaches suggest continued overvaluation.
- Housing and credit:
  - Housing market cooling in eastern capitals; price increases moderated in real terms.
  - Housing approvals fell after a mid-2016 peak.
  - Household credit growth slowed after prudential tightening; APRA tightened restrictions on interest-only mortgage origination and retained a 10 percent annual cap on lending growth for investment properties.
  - Credit to households continued to grow at an annualized rate of around 5½ percent while household income increased at around 2 percent; household debt ratios rose further through 2017.
  - Household survey: share of households with debt-to-income ratios of three or higher rose further across income quintiles.

### Outlook
- Growth and employment:
  - Recovery expected to accelerate and gradually return to full employment, driven by infrastructure investment momentum.
  - Mining investment expected to increase at rates consistent with capital stock maintenance as it bottoms out.
  - Rebound in business and public investment should outweigh softening residential investment.
  - Export growth expected to remain robust given higher global growth and demand from Asia.
  - Private consumption expected to strengthen with strong employment growth and eventual rising compensation.
- Inflation:
  - Forecast to return to the midpoint of the target range within the next three years.
  - Near-term disinflationary effects from stronger retail competition, recent real appreciation, and slower shelter costs expected to weigh on inflation.
- Housing baseline:
  - Baseline assumes a soft landing in the housing market.
  - Household credit and debt growth forecast to align with household income as house price increases slow; a sharp price correction is not forecast given strong population growth and little evidence of rising inventory.
- Potential output:
  - Staff updated estimates imply a small downward revision in medium-term growth prospects.
  - Potential output growth declined by some ¾ percentage points over 2007-16 and is estimated at 2½ percent in 2016.
  - Decline driven mainly by lower net migration and lower rates of capital accumulation.
  - Trend TFP growth has picked up (reflecting mining sector dynamics) and is assumed to remain at recent rates.

### Risks
- Overall near-term risk outlook broadly balanced.
- Domestic risks:
  - Upside: stronger-than-expected pickup in non-mining business investment and domestic momentum.
  - Downside: weaker private consumption if household income improvements are gradual or if housing cooling and high debt-to-income ratios raise risk aversion.
- External risks:
  - Unexpectedly tighter global financial conditions could reduce business investment and interest-sensitive demand.
  - Strong exposure to economic and financial risks in China; exchange rate flexibility cushions but sectoral impacts could be substantial.
- Housing-specific risks:
  - A large negative shock interacting with housing vulnerabilities could trigger a sharp house price correction and negative feedback loops affecting wealth, lending capacity, and aggregate demand.
  - Scenario risks: non-completion of large pre-sold apartment projects, lower dwelling investment, larger house price correction than baseline.
- Potential growth risks:
  - Authorities expect potential growth around 2¾ percent, broadly consistent with Staff’s updated estimates.
  - Two-sided IMF 5-year horizon risks: upside from infrastructure, reduced gender gaps, higher business investment and competition; downside from harder-to-realize TFP gains in a more services-oriented economy.

### Macroeconomic policy guidance
- Monetary policy:
  - Stance should remain accommodative until stronger domestic demand growth and inflation are highly likely.
  - Staff agrees with RBA signaling that stance is sufficiently accommodative for inflation to return gradually to 2-3 percent target.
  - RBA should communicate commitment to meeting inflation objectives and implications for monetary stance; forward guidance could help avoid market-induced premature tightening.
- Fiscal policy:
  - Infrastructure spending boost is welcome; overall fiscal stance assessed broadly neutral in 2017 and 2018.
  - Fiscal impulse based on general government structural balance remains negative but underestimates multiplier from infrastructure and equity injections/PPPs.
  - Commonwealth budget repair strategy anchored by medium-term balance targets but vulnerable to lower nominal growth.
  - Australia has substantial fiscal space to absorb risk from lower nominal growth and protect or increase spending envelopes for macrostructural reforms.
- Policy balance:
  - Continued macroeconomic policy support required to secure return to full employment and inflation objectives; avoid premature unwinding of policy support.

### Housing policy, CFMs, and supply-side reform
- Authorities’ multipronged approach:
  - Supply-side: increased infrastructure spending, zoning and planning reforms; Commonwealth support in FY2017/18 budget.
  - Prudential: APRA tightened bank lending standards (including restrictions on interest-only loans and 10 percent cap on investment lending growth).
  - Demand-side: CFMs and measures discriminating between residents and nonresidents (stamp duty surcharges and land tax surcharges in Victoria, New South Wales, Queensland; Commonwealth limits on developer sales to foreign investors; removal of primary residency CGT exemption for nonresident investors).
- Staff view on CFMs:
  - CFMs complement domestic measures by reducing price pressure from foreign buyers as an interim tool before supply measures take effect.
  - Staff recommended reconsidering CFMs:
    - Replace CFMs by alternative and effective nondiscriminatory measures where available.
    - Remove existing CFMs once inflow surge abates.
    - Consider a general surcharge on all vacant property in urban settings rather than residency-based levies.
- Supply-side reforms and tax reform to improve affordability:
  - Replace stamp duties with a systematic land tax with fewer exemptions; implement gradually with deferral options for owner-occupiers.
  - Lower capital gains discounts and limits to negative gearing for investors.
  - Limit capital gains tax exemptions for owner-occupiers.
  - Reforms should consider broader tax parameters to avoid disruptive valuation changes.

### Banking sector and capital adequacy
- APRA capital adequacy reforms:
  - Framework (July) clarified capital requirements for banks to be “unquestionably strong.”
  - For the four major banks using internal rating models, framework implies CET-1 capital ratios of at least 10.5 percent by January 1, 2020.
  - The 10.5 percent requirement is some 1.5 percentage points above current requirements and some 0.5 percentage points above ratios in 2017Q3.
  - APRA estimates that after adjustments this translates into substantially higher CET-1 ratios on an internationally comparable basis.
  - APRA preparing regulations to make capital requirements a function of exposure concentration to residential mortgages.
- Banking metrics (through 2017):
  - Capital adequacy ratio rose by another 0.8 percentage points through 2017, reaching 14.6 percent by end-September, with 10.6 percent in the form of Common Equity Tier 1 (CET-1) capital.
  - For the four large banks, CET-1 capital amounted to 10 percent of risk-weighted assets.
  - Liquidity coverage ratio comfortably above minimums; many banks had NSFR above 100 percent by end-September.

### Structural reforms, productivity, and labor
- Structural priorities:
  - Address infrastructure gaps, strengthen competition, foster R&D, reduce gender gap in labor force participation.
- Specifics and staff recommendations:
  - Further infrastructure spending should be considered; closing the infrastructure gap could raise real GDP by as much as 0.7 percent in the long term (Staff estimate).
  - NISA funding A$1.1 billion (0.06 percent of GDP), funded only through FY2018/19; recommend longer-dated resource commitments and implement 2030 Strategic Plan for Australian Innovation, Science and Research System.
  - Active labor market policies funded at A$1.8 billion (about 0.1 percent of GDP); recommend securing long-term funding (including via proposed levy for the Skilling Australians Fund) and aligning education to population and sectoral needs.
  - Reducing the gender gap (~12 percentage points in 2014) by one fourth would lift real GDP by about 1 percent via labor supply effect and could improve trend TFP.
  - Tax reform prescription: lower taxes on income from mobile factors (capital and labor) and increase reliance on taxes on immobile factors (land) and indirect consumption taxes in a revenue-neutral way.
  - Comprehensive reform scenario cited could raise real GDP by at least 1.3 percent.

### Wage dynamics (Box 1: key findings)
- Average annual wage growth declined from close to 6 percent in 2007 to about 1 percent in 2016, exceeding the median decline in advanced economies.
- Factors explaining weak nominal wage growth:
  - Economic slack, including increased underemployment above pre-recession levels.
  - Lower inflation outcomes and inflation expectations; average size and frequency of wage increases declined.
  - Labor productivity dynamics: mining-related developments produced different productivity dynamics; labor productivity has increased since the end of the mining boom.
  - Structural factors: technological change, globalization, and changes in labor market institutions (e.g., lower worker bargaining power).
- Country-specific factors:
  - Rebalancing toward lower-paid services jobs since the end of the mining boom.
  - A wage measure not affected by compositional change shows relatively smaller wage declines.
  - A modest appreciation of the real effective exchange rate may have put downward pressure on wages.
- Tighter labor market conditions should eventually result in stronger wage growth; Australia’s recovery is lagging other advanced economies in adjusting from the mining investment boom.

### External position and current account
- Current account:
  - CA deficit in 2017 is projected to narrow to 1.9 percent of GDP, primarily reflecting stronger terms of trade and ramp-up in new resource exports.
  - Over the medium term, CA deficit expected at around 2.5 percent of GDP.
  - EBA CA regression approach for 2017 estimates a CA norm of -1.6 percent of GDP, with standard deviation 0.6; cyclically adjusted CA for 2017 estimated at -2.1 percent of GDP, yielding a CA gap of -0.5 percent of GDP.
- Real exchange rate:
  - REER appreciated by 1 percent in 2016 relative to 2015; average REER through September 2017 up by 3.8 percent compared to 2016 average.
  - REER as of September 2017 is some 17 percent above its thirty year average.
  - Staff assesses REER to be 0 to 10 percent above level implied by medium-term fundamentals and desirable policy settings.
  - Using EBA CA-to-REER elasticity of 0.19, the -0.5 percent CA gap is consistent with an exchange rate overvaluation of around 2.6 percent in 2017; other EBA approaches give gaps from 7.1 to 19.3 percent.
- Net international investment position:
  - NIIP reached -58 percent of GDP in 2016; expected to improve in 2017 by 4 percent of GDP relative to 2016 and remain around -55 percent of GDP over the medium term.
  - External position assessed broadly consistent with medium-term fundamentals and desirable policies.
- External exposures:
  - Foreign liabilities: around one quarter FDI, one half portfolio investment (principally bank foreign funding and foreign holdings of government bonds), one quarter other investment and derivatives.
  - Liabilities largely denominated in Australian dollars; assets in foreign currency.
  - Banking sector has net foreign currency liability position but it is fully hedged.

### Public finances and debt sustainability (Annex IV summary)
- Public sector debt baseline nominal gross public debt (percent of GDP): sequence 20.6, 37.8, 40.9, 42.5, 43.3, 42.6, 40.3, 37.6, 35.5 (2015–2022).
- Public gross financing needs (percent of GDP): 2.4, 2.9, 2.7, 4.9, 4.3, 3.9, 3.4, 2.7, 3.4 (2015–2022).
- Real GDP growth projections (percent): 2.8, 2.5, 2.6, 2.2, 2.9, 3.1, 2.9, 2.7, 2.7 (2015–2022).
- Inflation (GDP deflator, percent): 3.0, -0.8, 1.1, 3.3, 1.3, 1.8, 2.0, 2.3, 2.6 (2015–2022).
- Effective interest rate (percent): 6.1, 4.4, 4.0, 3.5, 3.4, 3.3, 3.3, 3.4, 3.4 (2015–2022).
- Identified debt-creating flows (percent of GDP, annual): primary deficit and other flows series reported; automatic debt dynamics contribution and stock-flow adjustments detailed in source figures and tables.
- Public DSA scenarios:
  - Baseline, Historical, and Constant Primary Balance scenarios presented with associated projections and sensitivities (see figures for detailed sequences).

### Key quantitative indicators (selected)
- RBA cash rate: 1.5 percent (since August 2016).
- Household debt (percent of disposable income) series includes values: 171, 175, 183, 188, 195, 196, 192, 190, 189, 188, 188.
- Current account (percent of GDP) series includes values: -3.4, -3.1, -4.7, -2.9, -1.9, -2.5 (table entries in source).
- Net international investment position: -58 percent of GDP in 2016; expected around -55 percent over medium term.
- Banking sector indicators: regulatory capital to risk-weighted assets around 11.8–14.6 (percent); nonperforming loans to total gross loans around 1.0 (percent); return on assets around 1.2 (percent).

### Scenario and box highlights
- Box 2 (China linkages and scenario): ANZIMF disorderly rebalancing scenario: China’s real GDP 10 percent lower after 10 years; for Australia, net effects can be broadly offsetting with a small long-term real GDP increase (almost 0.4 percent) absent financial contagion.
- Box 3 (Forward guidance simulation): illustrative RBA path would keep policy rate at current level for about a year before gradual rises; headline inflation returns to 2.5 percent by 2020Q1; recommendation to publish conditional interest rate path and confidence bands.
- Box 4 (Infrastructure gap): Global Infrastructure Hub analysis: annual shortfall almost 0.4 percent of GDP, cumulative gap 10 percent of GDP by 2040; closing gap by 2040 yields long-term real GDP gains 0.5-0.7 percent; closing by 2027 yields larger near-term gains (detailed percent-point sequences provided in source).
- Box 5 (Housing boom): boom concentrated in Sydney and Melbourne; these metropolitan areas accounted for two-thirds of national GDP growth in 2015-16 and registered population growth at around twice the national rate.

### Staff appraisal (summary)
- Recovery from the mining boom advanced further in 2017 but is not complete.
- Infrastructure investment push contributed to domestic momentum; private business investment picked up.
- Employment growth strengthened markedly; unemployment moderated further.
- Wage growth weak and private consumption subdued; inflation remains below midpoint of RBA 2 to 3 percent target.
- Near-term conditions support pickup to above-trend growth and further declines in slack driven by global outlook, employment growth, and infrastructure investment.
- Continued macroeconomic policy support is essential until domestic demand momentum and inflation near the target midpoint are secured.
- Monetary policy: cash rate at 1.5 percent; remains appropriately accommodative and should focus on securing the domestic recovery.
- Fiscal strategy: Commonwealth budget repair anchored by medium-term balance targets; Australia has substantial fiscal space to absorb downside risk and protect or increase spending envelopes for infrastructure and structural reforms.

*Source: IMF Country Report cr1844 (selected excerpts as provided).*

### 1. Australia’s Wage Dynamics in International Comparisons _____________________________________ 25

### 1. Australia’s Wage Dynamics in International Comparisons _____________________________________ 25

### Context
- Australia experienced a protracted adjustment and rebalancing after the end of the large mining boom of the 2000s.  
- Exchange rate flexibility and prompt monetary easing moderated adverse demand impacts from lower commodity prices after 2011 and the unwinding of the mining investment boom.  
- Export orientation to dynamic Asia economies and relatively high population growth supported by immigration aided the adjustment.  
- Nominal and real wage growth have declined, contributing to inflation being below the Reserve Bank of Australia’s (RBA’s) target range of 2 to 3 percent since 2014.  
- A housing boom has supported the adjustment but produced market imbalances and higher household vulnerabilities:
  - House prices in major eastern capital cities (Melbourne and Sydney) rose sharply in recent years.
  - Standard metrics indicate house price overvaluation in the order of 5 to 15 percent at the national level.
  - Household debt ratios are high by international comparison.
  - Commercial banks’ housing exposure is substantial at over 50 percent of total assets.  
- Australia has gained substantially from China’s rapid growth, but faces infrastructure gaps after rapid population growth and challenges from urbanization and regional/structural shifts.  
- Productivity has lagged; policy priorities include securing future productivity growth in a more services-based economy, avoiding higher structural unemployment after protracted adjustment, and further reducing gender imbalances in labor force participation.

### Recent developments (Past year)
- Demand and growth:
  - Average quarterly growth over the past year was close to potential, but volatile due to weather-related disruptions to construction, and mining activity and exports.
  - Aggregate demand was led by strong public investment growth amid a boost in infrastructure spending and a recovery in business investment.
  - Private consumption growth remained subdued, held back by weak real income growth; residential investment declined; net exports contributed less to growth.
  - At the State level, final demand growth remained strong in non-resource-led states and began to recover in resource-led states.
- Labor market:
  - Employment growth was strong in 2017; unemployment dropped to 5.4 percent in the third quarter.
  - Underemployment has declined more recently and tentatively.
  - Annual nominal wage growth remained weak despite declining labor market slack.
  - A 3.3 percent increase in the statutory national minimum wage in mid-2017 directly affects about 20 percent of the employed and could indirectly affect another 5 percent; it has not yet had a discernible impact on aggregate wage statistics.
- Prices and inflation:
  - Inflation increased over the past year but remains slightly below the RBA target range of 2-3 percent.
  - Rebound in nontradable inflation largely resulted from one-off increases in utility prices and higher tobacco excise; domestic market services inflation increased modestly.
  - Tradable inflation declined, reflecting part real exchange rate appreciation and increased competition in some sectors, including retail trade.
- Current account and terms of trade:
  - Terms of trade improved more than expected, primarily due to higher world prices for coal and iron ore.
  - The trade balance moved into surplus in the year through 2017Q3.
  - Staff estimates: midpoint estimate of the current account gap narrowed in 2017 to -0.5 percent of GDP in the 2017 EBA Update, suggesting the current account deficit is broadly in line with fundamentals and desirable policies.
  - Staff’s view: exchange rate overvaluation is moderate, though some approaches suggest continued overvaluation.
- Housing and credit:
  - Housing market cooling in eastern capitals; price increases moderated in real terms.
  - Cooling concentrated in inner-city apartments in Brisbane, and especially Melbourne and Sydney.
  - Housing approvals fell after a mid-2016 peak; lower share of residential real estate sold through public auctions.
  - Household credit growth slowed after prudential tightening targeting riskier loan categories; APRA tightened restrictions on interest-only mortgage origination and retained a 10 percent annual cap on lending growth for investment properties.
  - Credit to households continued to grow at an annualized rate of around 5½ percent while household income increased at around 2 percent; household debt ratios rose further through 2017.
  - Variation in household balance sheet health; the household income and wealth survey indicates the share of households with debt-to-income ratios of three or higher rose further across income quintiles.

### Outlook
- Growth and employment:
  - Recovery expected to accelerate and gradually return to full employment, driven by infrastructure investment momentum.
  - Investment-driven acceleration should broaden as mining investment bottoms out and stops subtracting from growth; mining investment expected to increase at rates consistent with capital stock maintenance.
  - Rebound in business and public investment expected to outweigh softening residential investment and a small rebound in import growth from higher investment.
  - Export growth expected to remain robust given higher global growth and continued strong demand for key commodities and services from Asia’s growing middle class.
  - Private consumption expected to strengthen on the back of strong employment growth and, eventually, rising compensation.
- Inflation:
  - Forecast to return to the midpoint of the target range within the next three years.
  - Near-term disinflationary effects from stronger retail competition, recent real appreciation, and shelter costs slowing with house prices are expected to weigh on inflation.
- Housing baseline:
  - Baseline assumes a soft landing in the housing market.
  - Household credit and debt growth forecast to align with household income as house price increases slow due to increased supply and demand shifts toward renting; a sharp price correction is not forecast given strong population growth and little evidence of rising inventory of new residential units.
- Potential output:
  - Staff updated estimates imply a small downward revision in medium-term growth prospects.
  - Potential output growth declined by some ¾ percentage points over 2007-16 and is estimated at 2½ percent in 2016.
  - Decline driven mainly by lower net migration and lower rates of capital accumulation as adjustments to the end of the mining boom completed.
  - Trend TFP growth has picked up (reflecting mining sector dynamics) and is assumed to remain at recent rates.

### Risks
- Overall near-term risk outlook broadly balanced, with downside concerns from housing-related vulnerabilities and interactions with large negative shocks.
- Domestic risks:
  - Upside: pickup in non-mining business investment and domestic momentum could be stronger than expected amid stronger global growth and infrastructure investment.
  - Downside: private consumption could be weaker if household income improvements are gradual, or if a cooling housing market and high debt-to-income ratios raise consumer risk aversion.
- External risks:
  - Unexpectedly tighter global financial conditions could transmit to domestic conditions and reduce business investment and other interest-sensitive demand components.
  - Passthrough of external financial shocks might be small depending on drivers; correlation between term premium changes on U.S. government bonds and Australian government bonds has generally been low, reflecting insulation from exchange rate flexibility and monetary policy autonomy.
  - Strong exposure to economic and financial risks in China given trade and commodity linkages; exchange rate flexibility provides cushioning but impacts on specific sectors could be substantial.
- Housing-specific risks:
  - A large negative shock, most likely external, interacting with housing vulnerabilities could trigger a sharp house price correction (“hard landing”), producing negative feedback loops between prices, household wealth and financial positions, lending capacity, and aggregate demand.
  - Scenario risks include non-completion of large pre-sold apartment projects, lower dwelling investment, and a larger house price correction than under the baseline with corresponding negative aggregate demand effects.
- Potential growth risks:
  - Authorities expect potential growth around 2¾ percent, broadly consistent with Staff’s updated estimates.
  - Two-sided risks over the IMF’s 5-year projection horizon:
    - Upside: infrastructure investment, mining sector cost control, a policy package to reduce gender gaps in labor force participation, higher business investment, and increased competition could raise TFP and capital accumulation.
    - Downside: TFP gains might be harder to realize in a more services-oriented economy.

*Source: cr1844 - 1. Australia’s Wage Dynamics in International Comparisons (IMF).*

### 11.      The authorities expect the economy to expand at a solid pace, with a gradual pickup in

### 11.      The authorities expect the economy to expand at a solid pace, with a gradual pickup in

### Growth outlook and near-term drivers
- Average GDP growth is projected to strengthen gradually to 3 percent over the next few years.
- The ramp-up in LNG production following the final leg of the capacity expansion would contribute to growth in 2018-19.
- Non-mining investment growth is forecast to increase:
  - initially driven by the rise in infrastructure activity and favorable financing conditions,
  - eventually reinforced by stronger economic activity more generally.
- Recent developments supporting the outlook:
  - Non-mining investment growth has been stronger than previously thought.
  - Labor market conditions have strengthened considerably of late.

### Risks to growth
- Risks assessed as balanced.
- External upside:
  - Current expansion in the global economy could be more self-sustaining than expected, particularly if investment growth gained momentum, leading to higher potential output growth.
- External downside:
  - Possibility of a hard landing in China remains a medium-term concern.
  - Geopolitical tensions and increased global trade protectionism have become more prominent risks.
- Domestic upside:
  - Public infrastructure work could generate larger flow-on effects and boost private business investment more than forecast.
- Domestic downside:
  - Consumption growth could be weaker if households start viewing lower income growth as more persistent.

### Macroeconomic policies to ensure return to full employment — Context
- Australia’s rebalancing to non-mining based growth is not yet complete; return to full employment will take time.
- Monetary policy stance:
  - Accommodative. The current policy rate setting implies a real policy rate at zero relative to estimates of the real neutral long-term interest rate in the range of 1 to 2 percent.
- Fiscal/infrastructure stance:
  - Infrastructure spending at the Commonwealth and State levels has increased by an average of 0.5 percent of GDP annually over the next 4 years relative to the last Article IV Consultation.
- While growth is forecast to be above potential by next year, broad domestic demand momentum and full employment will develop only gradually; widespread upward pressure on prices and wages expected only once full employment has persisted.

### Staff’s views on macro policy
- Continued macroeconomic policy support is required to secure the return to full employment and inflation objectives.
  - Although the case for ex-ante policy insurance against downside risks has weakened versus the last Article IV Consultation, a premature unwinding of policy support should be avoided given current conditions and prospects.
- Monetary policy recommendations:
  - The monetary policy stance should remain accommodative until stronger domestic demand growth and inflation are highly likely.
  - Staff agrees with RBA signaling that the stance is sufficiently accommodative for inflation to return gradually to the 2-3 percent target.
  - Given uncertainty about unwinding recent temporary disinflation (lower oil prices, stronger retail competition, and a real appreciation), the RBA should communicate its commitment to meeting inflation objectives and the implications for the monetary stance.
  - Forward guidance could help avoid a market-induced premature tightening of monetary and financial conditions in Australia.
- Fiscal policy assessment:
  - The turn to a more supportive fiscal policy stance because of the national infrastructure investment boost is welcome.
  - The fiscal impulse based on the general government structural budget balance remains negative but underestimates the multiplier from higher infrastructure spending and the increase in spending via equity injections into non-financial public corporations and public-private partnerships.
  - Staff assesses the overall fiscal stance to be broadly neutral in 2017 and 2018, allowing increased infrastructure investment to support adjustment and rebalancing.
- Fiscal risks and space:
  - The Commonwealth budget repair strategy is anchored by medium-term budget balance targets but vulnerable to lower nominal growth.
  - The FY2017/18 consolidation plan is predicated on a rapid rebound of nominal growth to trend; risk that gradual recovery may not deliver as rapid a rebound, posing risks to spending envelopes for macrostructural reforms, including infrastructure spending.
  - Australia has substantial fiscal space to absorb risk from lower nominal growth and protect or, if needed, increase spending envelopes for macrostructural reforms.
  - Standard metrics, including gross debt, suggest Australia has fiscal space under both the baseline and economic stress scenarios.

### Authorities’ views
- RBA:
  - Assesses current monetary stance as appropriately accommodative.
  - Under the baseline outlook, it would support a gradual return of inflation toward the midpoint of the target range, while employment growth would be robust.
  - Expects tighter labor markets to eventually lift wages and prices; in the meantime, strong employment growth should support household income and consumption even if wage growth is slow.
  - Does not see a case for further easing under the baseline outlook because further easing would come with higher risks to financial stability.
- Government budget strategy:
  - Continues with budget repair strategy and focus on containing recurrent spending.
  - Commonwealth and State governments have markedly increased infrastructure spending, including through asset recycling and public-private partnerships.
  - Commonwealth financing approaches for new recurrent spending include the upcoming increase in the Medicare levy to meet remaining financing needs of the National Disability Insurance Scheme and earmarked funding pools for long-term use (e.g., Skilling Australians Fund).
  - Treasury noted projected increases in public debt ratios are attributable for the most part to productive investment.

### Reducing housing-related imbalances and vulnerabilities — Context
- House price increases moderating; related imbalances and vulnerabilities in the eastern capitals expected to stabilize but unlikely to decline soon absent a significant house price correction.
- A prospective reduction in imbalances will likely be driven by higher income growth, implying a slow decline in price-to-income or debt-to-income ratios.
- Authorities have pursued a multipronged approach:
  - Supply-side: increased spending on infrastructure to increase accessible and developable land; zoning and planning reforms; Commonwealth support in FY2017/18 budget.
  - Prudential: APRA has tightened bank lending standards to address risks to the banking system and household balance sheets.
  - Demand-side: measures discriminating between residents and nonresidents (CFMs), including stamp duty surcharges and land tax surcharges in Victoria, New South Wales, and Queensland; Commonwealth limits on sales for foreign investors by developers and withdrawal of primary residency exemption from capital gains taxes of nonresident investors.

### Housing market developments and financial sector resilience
- Capital inflow surge 2012-16 concentrated in eastern capitals, especially Melbourne and Sydney and also Brisbane; these three accounted for more than 90 percent of the increase in approvals for foreign buyers.
- RBA estimates:
  - One fourth of new apartments in the eastern capitals over the past few years were purchased by foreign buyers.
  - About 10 to 15 percent of transactions in newly-built residential property overall were by foreign buyers.
- Banking sector metrics (through 2017):
  - Capital adequacy ratio of the Australian banking system rose by another 0.8 percentage points through 2017, reaching 14.6 percent by end-September, with 10.6 percent in the form of Common Equity Tier 1 (CET-1) capital.
  - For the four large banks, CET-1 capital amounted to 10 percent of risk-weighted assets.
  - Liquidity coverage ratio comfortably above minimum requirements.
  - By end-September, many banks already had Net Stable Funding Ratios (NSFR) above the 100 percent required from January 1, 2018.

### Staff’s views on housing policy and reforms
- The broad multipronged policy approach is appropriate given macroeconomic and financial stability repercussions.
  - Prudential measures have addressed risks through tighter lending standards, though risks from a housing market hard landing remain.
  - Measures and credit supply shifts have not reduced demand-side incentives for real estate investment.
- Supply-side measures are critical for longer-term reduction of housing imbalances and vulnerabilities:
  - Legacy supply-demand imbalances in eastern capitals are narrowing after strong residential investment growth, but house prices are expected to remain high due to land scarcity and expectations of robust future demand given continued relatively high population growth.
  - Empirical evidence points to a long-term price elasticity of housing supply well below unity.
  - Low housing affordability risks spatial misallocation of resources, potentially holding back aggregate productivity growth given the eastern capitals’ significant share in national activity.
  - Continued efforts needed: streamlining development processes, strengthening planning, and providing for growth in smaller urban areas.
- Tax policy reforms to strengthen supply-side effectiveness:
  - State stamp duties tax real estate transactions and discourage alternative uses of urban land; stamp duties may hamper labor mobility.
  - Commonwealth-level preferential tax treatment favors residential real estate (e.g., capital gain tax exemptions for owner-occupiers and a 50 percent capital gain tax discount for investment property owned for more than one year combined with few limits on negative gearing).
  - Replacing stamp duties with broader land taxes should be a priority:
    - Replace stamp duties by a systematic land tax with fewer exemptions (e.g., no unlimited exemptions for owner-occupiers).
    - Gradual implementation with deferral options to be palatable to States and currently-exempt owner-occupiers.
  - Additional desirable measures:
    - Lower capital gains discounts and limits to negative gearing for investors.
    - Limits to capital gains tax exemptions of owner-occupiers.
  - Such reforms would lower incentives for leveraged real estate investment but should consider broader tax parameters, including possible land tax reform, to avoid disruptive valuation changes in housing markets.

### Views on capital flow management measures (CFMs)
- CFMs have been used to counter demand pressure from a capital inflow surge into housing and, in most cases, are consistent with the IMF’s Institutional View.
- CFMs are assessed to complement domestic measures by reducing price pressure from foreign buyers as an interim tool before supply measures become effective.
- APRA’s prudential measures could not address the capital inflow surge via credit supply channels because many nonresident investors rely on foreign finance.
- CFMs were designed as price measures to discourage, but not ban, acquisition of residential property by foreign buyers.
- Staff recommended reconsidering CFMs:
  - CFMs should be replaced by alternative and effective nondiscriminatory measures where available.
  - Existing CFMs should be removed once the inflow surge abates.
  - A less discriminatory alternative for vacant property would be a general surcharge on all vacant property in urban settings rather than residency-based levies.

*International Monetary Fund — Australia: Selected excerpts from the Article IV Consultation staff report (text as provided).*

### 33.      The capital adequacy framework is appropriately being refined further, raising capital

### 33.      The capital adequacy framework is appropriately being refined further, raising capital

### Capital adequacy reforms and mortgage concentration
- APRA issued a framework in July that clarified capital requirements for Australian banks to be “unquestionably strong,” as suggested by the 2014 Financial Sector Inquiry.
- For the four major banks, which use internal rating models, the framework implies CET-1 capital ratios of at least 10.5 percent by January 1, 2020.
- The 10.5 percent requirement is:
  - some 1.5 percentage points above current requirements,
  - and some 0.5 percentage points above ratios in 2017Q3.
- APRA estimates that after adjusting for stricter requirements in capital and risk weight calculations in Australia, this would translate into substantially higher CET-1 capital ratios on an internationally comparable basis.
- APRA is preparing regulations to address systemic risks from banks’ concentrated exposure to residential mortgages by making capital requirements also a function of exposure concentration, within unchanged overall capital adequacy requirements.
- Footnote: APRA estimates that at end-2016, the four major banks’ CET-1 capital ratio of 9.55 percent translated into 14.2 percent on an internationally comparable basis.

### Authorities’ views on housing, non-resident investors, and tax reform
- Policies implemented to respond to household balance sheets, property market risks and housing affordability include:
  - domestically-oriented macroprudential policies,
  - measures to promote housing supply via higher infrastructure spending and reforms to zoning and other regulations.
- Observed effects and expectations:
  - Lending activity developments following macroprudential policy interventions have been encouraging.
  - The quality of new mortgage lending assets has started to improve, lowering medium-term risks to financial stability.
  - Housing supply has increased substantially over the past few years, lowering the gap between underlying demand and supply and contributing to moderating upward pressure on house prices.
  - Housing markets are widely expected to stabilize.
- On measures affecting non-resident investors:
  - Australia supports open capital markets and a flexible exchange rate.
  - Measures that impact non-resident investors are part of the broad package to safeguard financial stability and promote housing affordability.
  - Measures are mostly price-based, calibrated to impose only a small additional cost on foreign investors, and do not ban foreign investment.
  - Authorities do not view these measures as CFMs since they were not designed to reduce capital flows or to delay warranted macroeconomic adjustment.
- On real estate taxation reform:
  - Reform could contribute to housing market stabilization only in the longer term.
  - States see benefits in shifting from stamp duties to broad-based land taxes but note changes must be gradual due to the important share of stamp duties in their revenue.
  - Political sensitivity and coordination with local council property taxes are constraints; the ACT’s gradual switch is unlikely to be a role model.
  - Changing capital gains taxation parameters could have large valuation implications and potentially destabilizing house price effects.
  - Prudential measures are preferable to address risks to financial stability in the shorter term.

### Fostering long-term growth opportunities — Context
- Recent productivity challenge observations:
  - Australia has maintained relative per capita income position vis-à-vis the United States in purchasing power terms.
  - Trend TFP growth in aggregate did not decline, on average, over the past five to seven years, an outcome largely reflecting sector-specific dynamics in mining.
  - Many other sectors recorded lower average productivity growth; Australia’s recent productivity performance was below average among AEs.
- Structural policy efforts focused on:
  - addressing infrastructure gaps,
  - strengthening competition,
  - fostering R&D.
- Specific initiatives and commitments:
  - Increased infrastructure spending by the Commonwealth and eastern state governments.
  - Competition law reforms enacted in November 2017 following the 2015 Competition Policy Review (the “Harper Review”).
  - The National Innovation and Science Agenda (NISA) to strengthen R&D.
  - 2014 government commitment to reduce the gender gap in labor force participation by 25 percent by 2025 (Brisbane Commitments, G-20).
  - Company tax reform seeking to reduce the statutory corporate income tax rate gradually from 30 to 25 percent; legislated so far: reduction to 27½ percent over 5 years for small companies with a turnover of up to A$50 million.
- The 5-Year Productivity Review (October 2017) proposes reforms to improve outcomes in health and education, foster urban development, improve regulation affecting market efficiency, and strengthen government effectiveness, suggesting a joint reform agenda for COAG.

### Fostering long-term growth opportunities — Staff’s views and recommendations
- Structural reform agenda assessment:
  - Appropriately focuses on infrastructure, R&D, and female labor force participation.
  - Funding envelopes are limited for some programs; longer-dated funding envelopes would increase certainty for participants.
  - Overlap in responsibilities between the Commonwealth and States complicates reform delivery.
- Infrastructure:
  - Further infrastructure spending increases should be considered.
  - Recent spending increases have narrowed the infrastructure gap but likely do not close it.
  - Closing the infrastructure gap could raise real GDP by as much as 0.7 percent in the long term (Staff estimate).
- Innovation and R&D:
  - Australia’s R&D share of GDP lags other OECD members.
  - NISA funding: A$1.1 billion (0.06 percent of GDP), funded only through FY2018/19.
  - Recommendation: longer-dated resource commitments and clear implementation of the 2030 Strategic Plan for the Australian Innovation, Science and Research System to strengthen policy reach and funding.
- Labor market and education:
  - Active labor market policies for re-education and skills upgrades are currently funded at A$1.8 billion (about 0.1 percent of GDP).
  - Recommendation: secure long-term funding (including via proposed levy for the Skilling Australians Fund) and align education to needs of growing population and sectoral shifts.
- Gender gaps:
  - Reducing the gender gap in labor force participation—around 12 percentage points in 2014—by one fourth would lift real GDP by about 1 percent through the labor supply effect and could have positive dynamic effects on trend TFP growth.
  - Government plans include measures to raise incentives for participation, enhance child care availability, improve workplace diversity, promote skills for technology-intensive sectors, and enhance financial incentives and awareness.
- Tax reform:
  - A broad tax reform package could increase efficiency, investment, labor demand and reduce inequality.
  - Policy prescription: lower taxes on income from mobile factors (capital and labor) and increase reliance on taxes on immobile factors (land) and indirect taxes on consumption in a revenue-neutral way.
  - Comprehensive reform scenario (Pitt, 2015) could raise real GDP by at least 1.3 percent.
  - Concerns about regressivity of higher consumption taxes could be addressed by broadening the base, reducing generous tax concessions, and revising income tax reform design.
- Productivity Review proposals:
  - Measures proposed could define new policy parameters and increase certainty for business investment, building upon Competition Policy Review enactments; further State-level agreements are needed.

### Authorities’ views on structural reform and implementation
- Treasury established a new structural reform group to collaborate on reform priorities across levels of government; overlapping responsibilities remain a constraint.
- New Commonwealth measures underway on infrastructure, education, reducing gender gaps, energy and innovation; Government will work with Productivity Commission’s 5-Year Productivity Review recommendations.
- Continuation of prior reforms:
  - Most Financial Services Inquiry recommendations implemented.
  - Commonwealth enacted competition law reforms; States still need to implement other microeconomic reforms.
  - COAG involved in implementing recommendations from the Independent Review into the Future Security of the National Electricity Market (the “Finkel Report”) and the National Energy Guarantee (NEG).
- Innovation policy:
  - Commonwealth will let existing NISA continue until and wind down by FY2018/19, maintaining some programs; will use the 2030 Strategic Plan to frame future innovation policy.
- Tax reform:
  - Authorities agree on the merit of tax reform and continue to push for corporate tax cuts for all companies.
  - First tranche (lower rate for companies with turnover up to A$50 million) has been legislated; legislation for remainder of company tax cuts is before the Parliament.
  - Review underway of how GST is used for fiscal equalization to encourage more stable funding for States.

### Staff appraisal — macro and fiscal outlook
- Recent macro assessment:
  - Recovery from the end of the mining boom advanced further in 2017 but is not yet complete.
  - Infrastructure investment push contributed to domestic momentum; private business investment has picked up.
  - Employment growth strengthened markedly and unemployment moderated further.
  - Wage growth is weak and private consumption growth subdued.
  - Inflation outcomes remain below the midpoint of the Reserve Bank of Australia’s 2 to 3 percent target range.
  - The external position is broadly consistent with medium-term fundamentals and desirable policies.
- Near-term outlook:
  - Conditions are in place for a pickup in economic growth to above-trend rates and further declines in economic slack driven by a stronger global outlook, stronger employment growth, and continued strong contributions from infrastructure investment.
  - Household consumption and real wages are expected to pick up later; upward pressure on prices and wages should start once the economy has been at full employment for some time.
- Policy stance:
  - Continued macroeconomic policy support is essential until stronger domestic demand momentum and inflation close to the target range midpoint are secured.
  - With a pickup in public investment, the overall fiscal stance is expected to be broadly neutral in 2017 and 2018.
  - Monetary policy: cash rate at 1.5 percent; monetary policy remains appropriately accommodative and should remain focused on securing the domestic recovery.
- Fiscal strategy:
  - Commonwealth government’s budget repair strategy is anchored by medium-term budget balance targets and predicated on a rapid rebound of nominal growth to trend.
  - Risk: a gradual recovery might lead to a slower rebound to trend than expected.
  - Australia has substantial fiscal space to absorb this risk and protect or, if needed, increase spending envelopes for infrastructure investment and structural reforms supporting trend growth and productivity.

*Source: IMF Country Report cr1844.*

### 55.      Australia has monetary and fiscal policy space to respond if downside risks to growth

### 55.      Australia has monetary and fiscal policy space to respond if downside risks to growth

### Near-term outlook and balance of risks
- The near-term balance of risks has improved, with both upside and downside risks to the recovery.
- Large external shocks, including their interaction with the domestic housing markets and high household debt, remain a concern.
- Australia is particularly exposed to downside risk from China through its trade links in commodities and services.
- Recommendation: Australia has monetary and fiscal policy space to respond if downside risks to growth should materialize.

### Household vulnerabilities and housing market dynamics
- Household vulnerabilities/imbalances are unlikely to be corrected soon, even with a soft landing of the housing market.
- Continued strong population growth means demand growth for housing is expected to remain robust.
- In the absence of a large inventory of vacant properties, prices should stabilize, rather than fall significantly.
- Declines in household debt-to-income ratios would thus need to be driven by strong nominal income growth and amortization.

### Supply-side policies and tax reform for housing
- Supply-side policies remain critical to manage housing affordability and risks, given continued demand for more urban space, and should be complemented by tax reform.
- Measures to be fully implemented at State and Commonwealth levels include reforms to rationalizing planning and zoning to promote efficient use of land in denser urban settings.
- States’ stamp duty tax regimes are described as inefficient and should be replaced with a systematic land tax regime applying to all residential and commercial properties.
- The capital gains discounts on housing should be reduced and other tax incentives limited.
- The housing CFMs (capital flow measures) should be reconsidered:
  - Alternative, effective measures that do not discriminate between residents and nonresidents should be implemented where feasible (i.e., on vacant properties).
  - The rest of the CFMs should be phased out once the capital inflow surge into the housing market abates.

### Structural reform agenda and productivity
- The structural reform agenda appropriately focuses on fostering productivity and strengthening labor force skills and composition but would benefit from new momentum.
- The increase in infrastructure spending provides welcome catch-up after a decade of strong population growth.
- Strengthening trend TFP growth through:
  - a stronger innovation system,
  - labor force skills upgrades, and
  - reduced gender imbalances
  is critical and related programs should be underpinned by longer-term strategies and longer-dated resource commitments.
- The reform agenda should be rejuvenated by drawing on the structural reforms proposed in the inaugural 5-Year Productivity Review.

### Consultation cycle
- It is recommended that the next Article IV consultation be held on the standard 12-month cycle.

### Box 1 — Australia’s wage dynamics (key findings)
- Average annual wage growth in Australia declined from close to 6 percent in 2007 to about 1 percent in 2016, exceeding the median decline in advanced economies.
- Factors explaining weak nominal wage growth:
  - Economic slack, including increased underemployment above pre-recession levels.
  - Lower inflation outcomes and inflation expectations; headline example: average size and frequency of wage increases declined.
  - Labor productivity dynamics: mining-related developments produced different productivity dynamics; labor productivity has increased since the end of the mining boom.
  - Structural factors: technological change, globalization, and changes in labor market institutions (e.g., lower worker bargaining power).
- Country-specific factors:
  - Australia benefited from sharply higher commodity prices before the Global Financial Crisis; since the end of the mining boom the economy rebalanced toward lower-paid services jobs.
  - A wage measure not affected by compositional change shows relatively smaller wage declines.
  - A modest appreciation of the real effective exchange rate may have put downward pressure on wages.
- Tighter labor market conditions should eventually result in stronger wage growth; Australia’s recovery is lagging other advanced economies as it adjusts from the end of the mining investment boom.

### Box 2 — Australia’s linkages with China and scenario analysis
- China–Australia linkages are strong through demand for commodities (coal, iron ore) and services (tourism, education).
- During China’s transition, both upside and downside risks may lead to rebalancing in Australia that dampens the overall impact.
- With Australia’s fully floating exchange rate, the economy can rebalance between domestic and external demand, and between trade with China and the rest of Asia (and the world); production can rebalance across sectors on the supply side.
- Disorderly rebalancing scenario (ANZIMF):
  - China’s real GDP is 10 percent lower after 10 years because of a downward revision in its expected future path for productivity and associated transmission channels.
  - For Australia:
    - Net commodity and services exports to China fall permanently.
    - The Australian REER depreciates, and exports to the rest of Asia (and the world) increase, more than offsetting some negative effects of lower exports to China.
    - Services exports are appreciably stronger on net.
    - Depreciation and loss of commodity wealth lead to weaker consumption and therefore weaker imports.
    - These movements lead to broadly offsetting effects on real GDP, which increases slightly (almost 0.4 percent) in the long term.
  - The benign overall effects are conditional on a lack of financial contagion from China; substantial financial turmoil would dampen outcomes for Australia and the rest of Asia.

### Box 3 — Forward guidance under current conditions (policy simulation)
- Baseline (illustrative) forecasting approach:
  - Policy rate path derived by minimizing a loss function placing equal weights on output gap and inflation deviations.
  - Scenario assumptions: modest expansion of world economy, some U.S. Fed tightening, initial conditions reflecting Australia’s economic conditions as of 2017Q3.
- Key illustrative outcomes:
  - The RBA would plan to keep the policy rate at its current level for about a year before raising rates gradually over time.
  - This path would eliminate slack fairly quickly by keeping nominal and real interest rates in an accommodative stance for an extended period.
  - Headline inflation moves back to the 2.5 percent midpoint of the target range by 2020Q1.
- Forward guidance recommendations:
  - Publish all key aspects of a complete macroeconomic forecast, including the conditional interest rate path, to give a credible public account and minimize market mispricing.
  - The RBA would not be committed to the published policy rate path and should be prepared to adjust in response to new information; confidence bands around the baseline illustrate this flexibility.
  - To emphasize non-commitment, the central bank could publish the bands without the modal baseline forecast (the red line).

### Box 4 — Infrastructure gap and fiscal policy (key numbers and implications)
- Global Infrastructure Hub analysis: Australia faces an annual shortfall of almost 0.4 percent of GDP on infrastructure investment in transportation, telecommunications, electricity and water services, translating into a cumulative gap of 10 percent of GDP by 2040.
- Estimated real GDP gains from closing the gap (percent of GDP, deviation from baseline):
  - Gap Closed by 2040 (using Deficit or tax financing or PPP funding):
    - Real GDP as of 2018: 0.1-0.2
    - Real GDP as of 2022: 0.0-0.2
    - Real GDP as of 2027: 0.2-0.4
    - Long term: 0.5-0.7
  - Gap Closed by 2027 (using Deficit financing and/or PPP funding):
    - Real GDP as of 2018: 0.2-0.3
    - Real GDP as of 2022: 0.4-0.5
    - Real GDP as of 2027: 0.6-0.7
    - Long term: 0.7
- Interpretations:
  - Long-term gains range from 0.5 to 0.7 percent of real GDP; gains are higher with deficit financing or PPP agreements (PPP gains are an upper bound because most costs and risks are borne by the private sector).
  - Tax financing (PIT and/or GST) would offset almost one third of the long-term gains.
  - Closing the gap by 2027 yields greater short-term gains; short-term GDP gains would be twice as much until 2027 relative to slower closure, with real GDP reaching its new long-term level shortly after.

### Box 5 — Australia’s housing boom (summary)
- The housing boom of the past six years has primarily been a regional boom concentrated in Sydney and Melbourne.
- Much of the increase in the average real price of existing houses in the 8 capital cities has been driven by prices in the two major eastern metropolitan areas.
- Local factors in Sydney and Melbourne have influenced price dynamics:
  - These metropolitan areas accounted for two-thirds of national GDP growth in 2015-16.
  - They registered population growth at around twice the national rate.

*Source: IMF staff.*

### 1.5 percent, reflecting the geographic shifts in activity and resource allocation after the end of the mining

### 1.5 percent, reflecting the geographic shifts in activity and resource allocation after the end of the mining boom

### Housing supply, elasticity, and city price dynamics
- Supply constraints amplified price dynamics in Sydney and Melbourne.
- Housing supply elasticity (elasticity of residential investment with respect to real house prices):
  - Average elasticity at the national level: about 0.56.
  - Sydney: 0.21.
  - Melbourne: 0.61.
- In international comparison, the United States elasticity is "well above unity."
- Sydney faced a housing shortage when the boom began due to zoning restrictions aiming to limit city growth.

### House price developments and contributions to national growth
- House Price Developments in Major Cities (2011Q3-2012Q2=100): Sydney, Melbourne, Brisbane, Adelaide, Perth (chart referenced in source).
- Contribution to National Real GDP Growth charts reference decades: 1990s, 2000s, 2010s, 2015-16 (figures visualized in source).

### Growth performance and rebalancing after the mining boom
- Growth has picked up after recent setbacks but remains lower on average than before the Global Financial Crisis.
- Mining investment declined sharply after a long boom and appears close to bottoming out (chart shows Mining investment (% GDP) and Terms of trade (2000=100)).
- Economic slack has started to decrease with the pickup in activity.
- Rebalancing from domestic to external sources of growth moderated the impact of the mining bust.
- Private consumption growth remained lackluster since the end of the mining boom.
- Residential investment support has faded recently; business investment support has begun to strengthen.
- Growth Performance (Real GDP, y/y % change) shows averages:
  - Pre-crisis, Post-crisis, and 2017 measures (visualized in source).
- Output gap and cyclical indicators (charts referenced): Output gap, Capacity utilization, Cyclical unemployment rate (NAIRU defined as unemployment rate minus NAIRU).

### Current account, terms of trade, and external sector
- Current account balance improved to reach its lowest level in almost four decades (chart: Current account balance (% GDP)).
- Terms of trade:
  - Rebounded in 2016 and early 2017 and remain above early-2016 levels (Terms of Trade (2015Q3-2016Q2=100; Actual and forecast)).
  - Note: Forecasts are based on Budgets since 2013-14.
- Iron ore prices recovered from lows in early 2016, though some gains were lost recently.
- Commodity export volumes increased further since the end of the mining boom, keeping the value of resource exports broadly constant.
- Net external liability position described as "high compared to peers."

### Housing market imbalances and vulnerabilities
- Australia experienced large house price increases recently, similar to other buoyant markets (Real House Prices (2005=100) series).
- Upward shifts in valuation metrics: Price-to-Rent Ratio (percentage deviation from average, 2009 to latest available) and HousePrice-to-Income Ratio (percentage deviation from average, 2009 to latest available).
- Downshifts in affordability metrics observed.
- Household debt ratios are among the highest in AEs.
- Rising house prices only triggered a minor residential investment boom.
- Recent indicators suggest a cooling in the housing market (Residential Investment: Real, Y/Y % change; Housing Starts and Approvals in thousand units).

### Monetary policy stance and financial conditions
- The RBA has kept the policy rate at 1.5 percent since August 2016.
- Monetary policy ensured an accommodative stance; yield curves have shifted down (Australia Commonwealth Yield Curves, Dec-15, Dec-16, Dec-17).
- Consumer price inflation rose from its 2016 low, driven by a pickup in nontradable inflation (Overall CPI, Nontradables, Tradables).
- Wage growth has been decreasing even after unemployment started to decline (Wages annual % change; Unemployment rate and NAIRU).
- Easing of domestic financial conditions due to lower policy rates has been partly offset by real currency appreciation (Real Effective Exchange Rate and Terms of Trade (2000=100)).

### Public finances and fiscal stance
- Australia characterized as having a relatively small government and low level of public debt (Net Public Debt (% GDP; 2016) chart).
- Governments continue to consolidate, led by the Commonwealth; States and Territories keep budgets close to balance.
- Result: continued negative fiscal impulse, but less so in FY2017-18 and FY2018-19 compared to previous forecasts.
- Governments increased infrastructure investment relative to FY2016/17 budgets.
- Consolidated general government balance sheet shows net investment and net worth (charts referenced).

### Banking system strength and vulnerabilities
- Australian major banks are highly rated and profitable even after tighter capital and liquidity requirements.
- Dividend pay-out ratios are high (simple average of 19 banks referenced).
- Bank lending concentrated in housing: housing share in total lending increased over time.
- Banks reduced share of short-term offshore wholesale funding and increased domestic deposit funding.
- Higher capital ratios in part due to lower risk-weighted assets from higher share of mortgage lending.
- Capital Adequacy Ratios: Tier 1 capital and risk-weighted assets trends shown (chart referenced).

### Financial markets: yields, spreads, and market expectations
- Australian equity moved sideways recently; resource sector share prices boosted by higher commodity prices in 2016-17 and efficiency gains.
- Bank risk spreads are low (Five-year CDS spreads, average of four largest banks).
- Markets expect policy rates to remain low through 2018 (OIS-derived market expectation series).
- Yields reached new lows in 2016, have increased since but remain at lowest in decades (Australia Commonwealth Debt Yields).
- Spreads between Australian and U.S. Treasury yields slightly increased but remain close to lowest levels since 2001 (Australia Sovereign Spreads).

### Interconnections, spillovers, and external exposures
- Trade links mainly with China; exposure to commodity price shocks (Merchandise Exports by Destination (% total)).
- Financial links with New Zealand, Asia-Pacific, US, and UK; growing focus on Japan and China for Asia exposure.
- Foreign claims of Australian banks and Australian-owned banks' claims on Asia presented (consolidated, ultimate risk basis).
- Non-performing assets of banks' overseas operations are low (by region, % loans).

### Macro-structural position and productivity
- Australia has consistent but rather low productivity growth with potential to improve.
- Favorable economic and regulatory environment ranking: "21 out of 137 economies."
- R&D spending lags other advanced economies though improving over time (R&D Expenditures (% GDP) by Government/Business/University).
- Infrastructure investment gaps noted as an avenue to raise productivity.
- Trade environment conducive to strong foreign relationships; services exports dominated by education and tourism increasingly directed to China (Exports of Services (% GDP)).

### International comparison and labor, inflation, savings
- Australia experienced high per capita growth in 2010-16 (Average Annual Per Capita Real Growth (2010-16, % change)).
- Consumer Price Index (Y/Y % change) remained higher than many advanced economies: Average 2010-16 and Latest 2017 series.
- Unemployment relatively low (Average 2010-16 and Latest 2017).
- Trading partner growth, labor force growth, and gross national savings (average 2010-16, % metrics) illustrated in comparative charts.

### Key quantitative indicators (selected, from tables and charts)
- Policy rate: 1.5 percent (RBA cash rate since August 2016).
- House price index: series with values ending 2017 (e.g., 188, 195, etc., in table format).
- Household debt (percent of disposable income): series includes 171, 175, 183, 188, 195, 196, 192, 190, 189, 188, 188 (Table 1).
- Current account (percent of GDP) series: -3.4, -3.1, -4.7, -2.9, -1.9, -2.5, etc. (Table 3).
- Net international investment position: -58 percent of GDP in 2016; expected to improve in 2017 by 4 percent of GDP relative to 2016 and remain around -55 percent of GDP over the medium term.
- Fiscal indicators (Table 2): Revenue 33.8–35.7 percent of GDP across years; Expenditure 36.3–35.4 percent of GDP in various years; Gross debt 28.7–42.6 percent of GDP across years.
- Banking sector indicators (Table 5): Regulatory capital to risk-weighted assets ranged around 11.8–14.6 (percent); Nonperforming loans to total gross loans around 1.0 (percent) in recent years; Return on assets around 1.2 (percent).

### External position assessment and balance-sheet composition
- Background: NIIP reached -58 percent of GDP in 2016; has varied between -40 and -60 percent of GDP since 1988.
- Foreign liabilities composition: around one quarter FDI, one half portfolio investment (principally banks borrowing abroad and foreign holdings of government bonds), and one quarter other investment and derivatives.
- Liabilities largely denominated in Australian dollars; assets in foreign currency.
- NIIP expected to improve in 2017 (by 4 percent of GDP relative to 2016) and remain around -55 percent of GDP over the medium term.
- Assessment: NIIP level and trajectory are sustainable.
  - External Stability approach suggests NIIP would be stabilized at around current levels with a CA deficit between 2½-3 percent, larger than expected cyclically-adjusted CA deficit in 2017.
  - Structure of external balance sheet reduces vulnerability: liabilities mainly A$-denominated and a net foreign currency asset position means nominal depreciation tends to strengthen external balance sheet, all else equal.
  - Banking sector has a net foreign currency liability position but it is fully hedged.
  - Maturity of banks’ external funding has improved since the global financial crisis.
  - Even in a tail risk event where domestic banks suffer a major loss, the government's strong balance sheet position allows it to offer credible support.
- Overall assessment: "The external position of Australia in 2017 was assessed to be broadly consistent with medium term fundamentals and desirable policies. The CA deficit in 2017 is projected to narrow to" (sentence in source is truncated).

*IMF staff calculations and source charts and tables from the provided IMF chapter.*

### 1.9 percent of GDP

### 1.9 percent of GDP

### Current account
- Background:
  - Australia has run CA deficits for most of its history, reflecting a structural saving-investment imbalance with very high private investment relative to a saving rate which is already high by advanced country standards.
  - Since the early 1980s, deficits have averaged around 4 percent of GDP.
  - The CA deficit in 2017 is projected to narrow to 1.9 percent of GDP primarily reflecting stronger terms of trade, because of higher coal and iron ore prices in response to measures restricting domestic supply in China, and ramp-up in new resource export.
  - Over the medium term, the CA deficit is expected at around 2.5 percent of GDP.
  - This is lower than the historical average of around 4 percent, given the end of the prolonged import intensive mining investment boom and a lower interest differential on Australian bonds compared to foreign bonds.
  - With around half of Australia’s exports going to emerging Asia, a key risk is a sharper than expected slowdown in China which could result in a further sharp decline in commodities prices.
- Assessment:
  - The EBA CA regression approach for 2017 estimates a CA norm of -1.6 percent of GDP, with a standard deviation of 0.6.
  - Taking relative output gap into account, the cyclically adjusted CA for 2017 is estimated to be -2.1 percent of GDP, indicating a CA gap with -0.5 percent of GDP.

### Potential Policy Responses
- If growth remains on the weak side, or commodity prices fall again, further monetary accommodation would be warranted.
- The government’s planned gradual fiscal consolidation over the longer term should help improve the current account by boosting national savings.

### Real exchange rate
- Background:
  - After depreciating by 17 percent between 2012 and 2015, the real effective exchange rate (REER) appreciated by 1 percent in 2016 relative to its 2015 average.
  - The average REER through September 2017 is up by 3.8 percent compared to its 2016 average.
  - The REER as of September, 2017 is some 17 percent above its thirty year average, although well off the peak in 2012.
  - Continued substantial capital inflows may have contributed to the continued relative strength of the Australian dollar.
- Assessment:
  - Considering estimates of the CA gap based on the EBA CA regression and the estimated REER gap staff assesses the REER to be 0 to 10 percent above the level implied by medium-term fundamentals and desirable policy settings.
  - The recent appreciation of the exchange rate, accompanying the increase in terms of trade, suggests that the REER would remain somewhat overvalued.
- Technical note:
  - Using the EBA estimated CA-to-REER elasticity of 0.19, the -0.5 percent of GDP estimate of the CA gap under the CA regression approach is consistent with an exchange rate overvaluation of around 2.6 percent in 2017.
  - The EBA REER index regression approach, and the EBA REER level regression provide estimates of a gap encompassing a wide range from 7.1 to 19.3 percent in 2017.

### Capital and financial accounts: flows and policy measures
- Background:
  - The mining investment boom has been funded predominantly offshore.
  - Net FDI inflows into this sector have partially offset the reduced need for the banking sector to borrow abroad.
  - As investment in new mining projects winds down, related demand for imports will decrease, buffering the impact on the overall balance of payments.
  - Australia also received large inflows in recent years into bond markets given its sound fiscal position relative to other advanced economies, and owing to relatively high interest rate differentials.
  - The weighted average maturity of government bonds is 6.6 years, and has lengthened over time, with 90 percent of the issue maturing by 2027.
- Assessment:
  - Credible commitment to a floating exchange rate and a strong fiscal position limit the vulnerabilities.

### FX intervention and reserves level
- Background:
  - A free-floater since 1983.
  - The central bank undertook brief but large intervention in 2007–08 when the market for Australian dollars became illiquid (bid-ask spreads widened) following banking sector disruptions in the U.S.
  - The authorities are strongly committed to a floating regime, which reduces the need for reserve holding.
- Assessment:
  - Although domestic banks’ external liabilities are sizable, they are either in local currency or hedged with little or no counterparty risks, so reserve needs for prudential reasons are also limited.

### Risk Assessment Matrix — selected external and domestic risks and policy responses
- Domestic risks:
  - Stronger recovery momentum (Likelihood: M, Time horizon: Short term, Impact: M)
    - Business investment could recover faster with an infrastructure push and continued favorable financing conditions.
    - Policy: Monetary policy tightening if output gap closes much faster than expected.
  - Slowing of economic recovery (Likelihood: M, Time horizon: Short to medium term, Impact: M)
    - Consumption growth could be weaker with continued low wage growth and a higher incidence of part-time work.
    - Policy: Monetary policy easing with minor slowing; combined monetary and fiscal policy easing if economy hits the zero lower bound.
  - Housing market downturn (Likelihood: L, Time horizon: Short to medium term, Impact: H)
    - A sharp housing market correction would lower residential investment and private consumption; could amplify downturn via non-performing loans and tighter bank credit.
    - Policy: Monetary policy easing; fiscal policy stimulus; measures to facilitate mortgage debt restructuring, including selected fiscal intervention.
- External risks:
  - Significant China slowdown and its spillovers (Likelihood: M, Time horizon: Medium term, Impact: H)
    - A sharp adjustment in China resulting in large commodity price declines would lead to a major downturn in Australia.
    - Policy: Combined monetary policy and fiscal policy easing as economy could reach the zero lower bound quickly; structural fiscal measures to facilitate adjustment in commodity sectors and regions, including active labor market policies.
  - Structurally weak growth in key advanced economies (Likelihood: H, Time horizon: Medium term, Impact: M)
    - Lower growth would result in lower commodity prices and commodity consumption, leading to a downturn in Australia.
    - Policy: For temporary easing: monetary policy easing; combined monetary and fiscal policy easing if economy hits the zero lower bound. Structural reforms, including fiscal ones, to raise productivity.
  - Tighter global financial conditions (Likelihood: H, Time horizon: Short term, Impact: M)
    - Australia would be affected through asset price channels, international funding conditions of Australian banks, and spillovers on global growth and commodity prices.
    - Policy: Monetary policy easing; combined monetary and fiscal policy easing if economy hits the zero lower bound.
  - Policy uncertainty including retreat from cross-border integration (Likelihood: M, Time horizon: Short to medium term, Impact: M)
    - A rise in populism and nationalism could reverse trade liberalization, reduce global growth and commodity prices, and exacerbate financial market volatility.
    - Policy: Monetary policy easing; combined monetary and fiscal policy easing if economy hits the zero lower bound. Continued pursuit of open market policies.
  - Geopolitical uncertainties leading to strong Australian dollar (Likelihood: H, Time horizon: Short to medium term, Impact: H)
    - Escalated tensions in North East Asia could lead to significant decrease in external demand for Australia and capital inflows seeking safe haven, strengthening the Australian dollar and slowing activity and inflation.
    - Policy: Monetary policy easing; combined monetary and fiscal policy easing if economy hits the zero lower bound.
  - Lower energy prices (Likelihood: L, Time horizon: Short to Medium term, Impact: L)
    - If fuel prices did not increase as expected, real incomes of consumers would be higher, but coal and LNG sectors would be hurt.
    - Policy: The exchange rate would likely act as a shock absorber and dampen the impact; monetary policy response if needed.

*Source: IMF staff assessment as presented in the provided document "1.9 percent of GDP".*

### Annex IV. External and Fiscal DSAs

### Annex IV. External and Fiscal DSAs

### External Debt Sustainability — Bound Tests and Shocks
- Figure: "Australia: External Debt Sustainability: Bound Tests" (External debt in percent of GDP).
- Baseline external debt level shown as 111.
- Historical external debt level shown as 106.
- Interest rate shock scenarios: "i-rate shock" with labels 114 (shock), Baseline 111; horizontal axis shows years 2012, 2014, 2016, 2018, 2020, 2022; vertical axis ticks 0, 20, 40, 60, 80, 100, 120, 140, 160 (in percent of GDP).
- Scenario notes:
  - Individual shocks are permanent one-half standard deviation shocks.
  - Permanent 1/4 standard deviation shocks applied to real interest rate, growth rate, and current account balance.
  - One-time real depreciation of 30 percent occurs in 2018 and 80 percent of fx denominated external debts are assumed to be hedged to local currency.
  - For historical scenarios, historical averages are calculated over the ten-year period and used to project debt dynamics five years ahead.
- Scenario labels and box figures:
  - CA shock: Baseline 111, shock shown as 113.
  - Growth shock: Baseline 111, shock shown as 113; growth shock (in percent per year) — Baseline: 2.0, Scenario: 2.5, Historical: 2.6; alternative listing Baseline: 2.8, Scenario: 2.5, Historical: 2.8; another line shows Baseline: -0.4, Scenario: -0.8, Historical: -1.7.
  - Combined shock: Baseline 111, combined shock shown as 114.
  - Combined shock with 30% depreciation: Baseline 111, combined shock shown as 115.
- Gross financing need under baseline shown on right scale in figure.
- Non-interest current account shock measured in percent of GDP (figure axis labels present).

### Public Sector Debt Sustainability Analysis — Baseline Scenario (Figure 2)
- Baseline nominal gross public debt and projections (percent of GDP):
  - Nominal gross public debt: sequence shown 20.6, 37.8, 40.9, 42.5, 43.3, 42.6, 40.3, 37.6, 35.5 (years 2015–2022).
- Sovereign spreads and market indicators:
  - EMBIG (bp) 3/: 16
  - 5Y CDS (bp): 45
  - Ratings: Moody's Aaa; S&Ps AAA; Fitch AAA
- Public gross financing needs (in percent of GDP): time-series shown 2.4, 2.9, 2.7, 4.9, 4.3, 3.9, 3.4, 2.7, 3.4 (years 2015–2022).
- Real GDP growth (in percent): 2.8, 2.5, 2.6, 2.2, 2.9, 3.1, 2.9, 2.7, 2.7 (years 2015–2022).
- Inflation (GDP deflator, in percent): 3.0, -0.8, 1.1, 3.3, 1.3, 1.8, 2.0, 2.3, 2.6 (years 2015–2022).
- Nominal GDP growth (in percent): 6.0, 1.6, 3.8, 5.6, 4.2, 5.0, 4.9, 5.1, 5.3 (years 2015–2022).
- Effective interest rate (in percent) 4/: 6.1, 4.4, 4.0, 3.5, 3.4, 3.3, 3.3, 3.4, 3.4 (years 2015–2022).
- Change in gross public sector debt (cumulative): 2.6, 3.7, 3.1, 1.6, 0.8, -0.7, -2.3, -2.7, -2.1, -5.4 (cumulative to 2022).
- Identified debt-creating flows (percent of GDP, annual):
  - Primary deficit: 2.0, 1.8, 1.7, 1.3, 0.8, 0.1, -0.9, -1.2, -1.2, -1.0 (years shown).
  - Primary (noninterest) revenue and grants: 33.2, 34.1, 34.3, 34.3, 34.7, 34.8, 35.1, 35.2, 35.2, 209.3 (note: last entry appears in source).
  - Primary (noninterest) expenditure: 35.2, 35.9, 36.0, 35.6, 35.5, 34.9, 34.2, 34.0, 34.0, 208.3 (note: last entry appears in source).
- Automatic debt dynamics 5/ (percent of GDP): 0.1, 0.9, 0.1, -0.8, -0.3, -0.7, -0.7, -0.7, -0.7, -3.8 (years shown).
  - Interest rate/growth differential 6/: 0.1, 0.9, 0.1, -0.8, -0.3, -0.7, -0.7, -0.7, -0.7, -3.8.
    - Of which: real interest rate: 0.6, 1.8, 1.0, 0.0, 0.8, 0.6, 0.5, 0.4, 0.3, 2.6.
    - Of which: real GDP growth: -0.5, -0.8, -1.0, -0.9, -1.2, -1.3, -1.2, -1.0, -0.9, -6.5.
  - Exchange rate depreciation 7/: 0.0, 0.0, 0.0, ... (no material exchange rate contribution shown).
- Other identified debt-creating flows: 1.2, 1.5, 1.9, 1.5, 0.8, 0.4, -0.3, -0.3, 0.3, 2.5.
- Net privatization proceeds (negative): 0.0 across reported years.
- Contingent liabilities: 0.0, 0.0 shown.
- Stock-flow adjustment, incl. asset changes: 1.2, 1.5, 1.9, 1.5, 0.8, 0.4, -0.3, 0.3, 2.8.
- Residual, including asset changes 8/: -0.8, -0.5, -0.6, -0.4, -0.5, -0.5, -0.5, -0.5, -0.5, -3.0.
- Footnotes and definitions:
  - 1/ Public sector is defined as general government.
  - 2/ Based on available data.
  - 3/ Long-term bond spread over U.S. bonds.
  - 4/ Defined as interest payments divided by debt stock (excluding guarantees) at the end of previous year.
  - 5/ Automatic debt dynamics formula provided in source (explicit formula preserved in source).
  - 6/ Real interest rate contribution and real growth contribution definitions provided.
  - 7/ Exchange rate contribution definition provided.
  - 8/ Includes asset changes and interest revenues (if any). For projections, includes exchange rate changes during the projection period.
  - 9/ Assumes that key variables remain at the level of the last projection year.

### Public DSA — Projections, Underlying Assumptions, and Alternative Scenarios (Figure 3)
- Underlying assumptions (in percent) — Baseline vs. Historical vs. Constant Primary Balance scenarios (2017–2022):
  - Baseline Real GDP growth: 2.2, 2.9, 3.1, 2.9, 2.7, 2.7.
  - Historical Real GDP growth: 2.2, 2.8, 2.8, 2.8, 2.8, 2.8.
  - Inflation (Baseline and Historical): 3.3, 1.3, 1.8, 2.0, 2.3, 2.6.
  - Primary Balance (Baseline): -1.3, -0.8, -0.1, 0.9, 1.2, 1.2.
  - Primary Balance (Historical): -1.3, -2.3, -2.3, -2.3, -2.3, -2.3.
  - Effective interest rate (Baseline): 3.5, 3.4, 3.3, 3.3, 3.4, 3.4.
  - Effective interest rate (Historical): 3.5, 3.4, 3.6, 3.9, 4.2, 4.5.
  - Constant Primary Balance Scenario primary balance held at -1.3 across projection years.
- Composition of public debt and public gross financing needs displayed by:
  - By maturity: medium and long-term vs. short-term (percent of GDP) (2006–2022 series shown).
  - By currency: local currency-denominated vs. foreign currency-denominated (percent of GDP) (2006–2022 series shown).
- Public gross nominal debt projections shown for Baseline, Historical, Constant Primary Balance scenarios (percent of GDP) across 2015–2022.
- Public gross financing needs projections (percent of GDP) across 2015–2022.

### Fund Relations and Statistical Issues (Administrative and Data)
- Membership and IMF account positions (as of December 31, 2017):
  - Quota: 6,572.40 (SDR Million) — 100.00 percent.
  - Fund holdings of currency (exchange rate): 6,266.85 — 95.35 percent.
  - Reserve tranche position: 305.93 — 4.65 percent.
  - New Arrangements to Borrow: 245.60 (SDR Million).
- SDR Department:
  - Net cumulative allocation: 3,083.17 — 100.00 percent.
  - Holdings: 2,833.20 — 91.89 percent.
- Outstanding Purchases and Loans: None.
- Financial Arrangements: None.
- Projected Charges/interest (SDR million) Forthcoming 2018–2022: Charges/interest 1.93, 1.94, 1.94, 1.94, 1.94; Total 1.93, 1.94, 1.94, 1.94, 1.94.
- Exchange Rate Arrangement: Australia has accepted Article VIII obligations; exchange rate is free floating; Reserve Bank of Australia retains discretionary power to intervene; no taxes or subsidies on purchases or sales of foreign exchange.
- Restrictions on Capital Transactions: regime virtually free of restrictions; authorization required for significant ownership of Australian corporations; approval required for acquisition of real estate.
- Article IV Consultation: Australia on 12-month cycle; 2017 Article IV discussions held during November 6-20, 2017; Executive Board discussed and concluded consultation on February 7, 2018.
- FSAP Participation: Last FSAP Update discussed November 12, 2012 (IMF Country Report No. 12/308); next FSAP Update scheduled for 2018 and aligned with 2018 Article IV discussions.
- Statistical Issues:
  - Data provision adequate for surveillance; Australia subscribed to SDDS since April 1996.
  - Australia implemented all recommendations of first phase of G-20 Data Gaps Initiative except semi-annual CPIS reporting.
  - ABS initiatives to improve data quality; recommendation to add monthly inflation data would assist surveillance.
  - Table of Common Indicators Required for Surveillance (as of January 5, 2017) lists latest observation and frequency for indicators such as Exchange Rates (12/13/16), International Reserve Assets (11/16), Reserve/Base Money (11/16), Broad Money (11/16), Central Bank Balance Sheet (12/07/16), CPI (Q3 2016), Revenue/Expenditure/Balance (09/16), External Current Account Balance (Q3 2016), GDP/GNP (Q3 2016), Gross External Debt (Q3 2016), International Investment Position (Q3 2016).
  - Frequency codes: Daily (D), Weekly (W), Monthly (M), Quarterly (Q), Annually (A), Irregular (I); Not Available (NA).

### Statement by IMF Staff Representative (February 7, 2018)
- Inflation: At 1.9 percent in the fourth quarter, headline and core inflation rose in line with the previous quarter (year-on-year terms).
- Market goods and services excluding volatile items: price increases remain close to 1 percent; prices of tradables fell again.
- Private sector credit growth slowed in December to less than 5 percent (year-on-year), with slowdown concentrated in business and housing investor loans.
- Authorities informed staff of additional housing-related capital flow management measures (CFMs):
  - State of South Australia introduced as of January 1, 2018 a stamp duty surcharge of 7 percent on residential property purchases by foreign buyers and temporary residents.
  - Removal, as of July 1, 2017, of a stamp duty concession in South Australia for presales of new apartments renewed only for domestic buyers but not for foreign buyers.
- Staff view: Pre-emptive imposition of CFMs would be inconsistent with the Fund’s Institutional View on capital flows; pending further discussion, staff has yet to form a view on appropriateness of these measures.

### Statement by Alternate Executive Director and Authorities (February 7, 2018)
- Australia has completed its 26th year of economic growth; adjustment supported by open economy, flexible exchange rate, liberalized capital account, flexible labor and product markets, adaptive macroeconomic policies, strong institutions.
- Growth outlook:
  - Expected to return to around trend near term and be above potential from 2019-20, closing the output gap.
- Recent developments:
  - Employment increased in each of past 15 months (through December 2017), equaling longest consecutive streak since records began.
  - Underlying inflation in December quarter 2017 was 0.4 percent, to be 1.8 percent higher through the year.
  - MYEFO (December 2017) forecasted a smaller fiscal deficit in 2017-18 than 2017-18 Budget.
  - Agreement reached on Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP).
- Growth drivers 2017-18: public final demand (government infrastructure investment), non-mining business investment, household consumption, and exports (iron ore and LNG projects ramping up).
- Labor market: unemployment rate fell to 5.5 percent; participation rate 65.7 percent; female participation 60.6 percent; underemployment remains elevated.
- External position:
  - Current account deficit reflects investment outcomes not fully met by domestic savings.
  - Australia has net foreign liability position but net foreign currency asset position because bulk of foreign liabilities are issued in or hedged back into Australian dollars.
  - Banking sector hedges foreign currency liabilities matching duration; tendency to issue longer-term maturities reduces rollover/refinancing risks.
  - Current account deficit expected to remain towards low end of recent historical range; net foreign liabilities stable as share of GDP over past decade.
- Fiscal stance:
  - Government projects return to surplus in 2020-21.
  - Projected real payments growth of 1.9 percent of GDP on average over forward estimates.
  - Enterprise Tax Plan to reduce company tax rate to 25 per cent for all businesses.
  - Government continuing ten-year A$75 billion investment in transport infrastructure.
- Housing, household debt, and macroprudential measures:
  - Household debt elevated relative to incomes; debt growth outpaced very low household income growth.
  - Distribution of debt skewed to top two income quintiles holding over 60 percent of Australian household debt.
  - APRA introduced supervisory measures tightening credit standards; ASIC targeted responsible mortgage lending practices — resulting in reductions in riskier lending, slowed lending to housing investors, fewer high LTV loans, tightened debt-servicing tests, fewer interest-only loans; recent moderation in house price growth.
  - Authorities note macroprudential measures are ineffective with respect to non-resident investors using foreign finance; introduced additional demand-side measures aimed at non-resident investors.
- Authorities’ responses to IMF characterization of certain measures as CFMs:
  - Annual charge on foreign owners of under-utilized residential property (vacant properties only) intended to ensure foreign investment adds to housing supply; applies to stock of housing owned by foreign persons.
  - Prohibition on property developers selling more than 50 percent of new residential development to foreigners applies to developer pre-approvals and is capped at 50 percent; does not prevent foreign investment via individual approvals.
  - Use of Capital Gains Tax (CGT) withholding regime for non-resident tax liabilities is consistent with global norms and is a non-final withholding tax; denial of main residence CGT exemption to non-residents is a tax integrity measure.
  - Foreign investor surcharge on stamp duty and land tax in New South Wales intended to raise revenue and not expected to impede capital flows.
  - Authorities dispute IMF characterization of these measures as CFMs and call for review of the application of the Institutional View on Capital Flows, arguing intent and substance should matter, not just form.
- On tax recommendations related to housing:
  - Investment in housing (other than owner-occupied) treated the same as investment in other assets; deductions and the 50 percent capital gains tax discount apply broadly.
  - Stamp duties and land tax are levied by state governments, not the Australian Government.
- Authorities express appreciation for dialogue and IMF analysis presented in Selected Issues Papers.

*Source: IMF staff and Australian authorities, as presented in "Annex IV. External and Fiscal DSAs" (as of December 12, 2017 / Staff statements dated February 7, 2018).*

---


_Source: https://www.imf.org/-/media/files/publications/cr/2018/cr1844.pdf_