## _cr07314

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### Economic developments — key findings
- Real GDP expanded by 3¾ percent over the year to the first quarter of 2007.
- Non-farm GDP growth accelerated, while a severe drought reduced farm output, subtracting about ¾ of a percentage point in GDP growth in 2006/07.
- Growth was driven by domestic demand with consumer spending accelerating in the second half of the year, supported by rising employment and real wages.
- Headline and core inflation have eased recently in part reflecting temporary factors, particularly fuel and food prices.
- The current account deficit remained slightly above 5½ percent of GDP in 2006; historically Australia has run on average a deficit of about 4.5 percent of GDP.
- In 2006 the trade deficit narrowed owing to higher export prices and a modest lift in volumes; imports rebounded recently driven by firming domestic demand including strong imports of capital goods.
- The investment income balance continued to deteriorate, reflecting large net dividend payments particularly in the resource sector.
- Net foreign liabilities increased to over 60 percent of GDP.
- The private sector accounts for 99 percent of Australia’s net external debt, with 78 percent intermediated by private financial institutions.
- Terms of Trade (TOT) rose 40 percent in the last 4 years.

### Short- and medium-term outlook and risks
- Staff projections (Medium-Term Scenario 2006–12) — selected series:
  - Real GDP: 2.7 (2006), 4.4 (2007), 4.0 (2008), 3.4 (2009), 3.3 (2010), 3.2 (2011), 3.2 (2012)
  - Total domestic demand: 3.5 (2006), 5.1 (2007), 3.2 (2008), 3.0 (2009), 2.9 (2010), 2.8 (2011), 2.8 (2012)
  - Exports of goods and services: 3.4 (2006), 6.1 (2007), 9.0 (2008), 6.8 (2009), 6.1 (2010), 6.1 (2011), 6.1 (2012)
  - Imports of goods and services: 7.7 (2006), 9.5 (2007), 4.5 (2008), 4.3 (2009), 4.1 (2010), 3.9 (2011), 4.0 (2012)
  - CPI inflation: 3.5 (2006), 2.1 (2007), 2.8 (2008), 2.8 (2009), 2.8 (2010), 2.8 (2011), 2.8 (2012)
  - Unemployment rate: 4.8 (2006), 4.5 (2007), 4.5 (2008), 4.5 (2009), 4.5 (2010), 4.5 (2011), 4.5 (2012)
  - Current account balance (percent of GDP): -5.5 (2006), -5.6 (2007), -5.6 (2008), -5.6 (2009), -5.8 (2010), -5.7 (2011), -5.8 (2012)
- Short-term risks skew to the upside: pickup in housing starts, recovery in rural income with easing drought, and higher natural resource export volumes could raise growth and inflationary pressures.
- Medium-term risks are balanced: external developments (global slowdown or financial turbulence) and domestic factors (recurrent droughts, household balance sheet consolidation).
- Adverse scenario: a significant global slowdown could cause commodity prices to fall faster than assumed, reducing exports, dampening investment, and slowing growth.
- Upside scenario: commodity prices could continue to outperform expectations, putting upward pressure on an already stretched economy.

### Monetary policy
- The RBA raised the official interest rate by 25 basis points three times last year to 6¼ percent in view of tight capacity utilization and a build-up of inflationary pressures.
- The RBA kept rates on hold since November 2006 until tightening on August 8, 2007, when the official interest rate was raised from 6¼ percent to 6½ percent.
- Recent moderation in producer and consumer price indices and the appreciation of the Australian dollar have dampened inflation evidence, giving the RBA further time to assess the need for tightening.
- The RBA monitors domestic activity, household credit, and wage outcomes; a reemergence of inflationary pressure would call for prompt policy action.
- Available estimates for REER overvaluation range from 1 percent (RBA model) to 9 percent (CGER estimates); footnote estimates cited CGER overvaluation figures of 9 percent (equilibrium real exchange rate), 9 percent (macroeconomic balance approach), and 18 percent (external sustainability approach).
- Staff judged there is no significant misalignment of the exchange rate once recent TOT gains are taken into account.
- Staff supported a “wait-and-see” policy prior to August 2007 given data suggesting little urgency to raise interest rates.

### External stability and financial sector
- Net external liabilities reached 60 percent of GDP in 2006 and are projected to increase as high current account deficits persist over the medium term.
- High deficits reflect high domestic investment linked to attractive investment opportunities including vast natural resource reserves.
- RBA's assessment: growth in foreign liabilities is not a threat to external stability because borrowers are predominantly highly-rated banks, a significant portion of external debt is denominated in domestic currency or hedged, foreign currency assets exceed foreign currency liabilities, and Australia has deep, open financial markets.
- Staff concurred but cautioned that debt sustainability depends critically on a sound macroeconomic framework and sustained structural reform.
- Indicators of external and financial vulnerability (selected, 2002–06):
  - Current account balance (percent of GDP): -3.8 (2002), -5.4 (2003), -6.0 (2004), -5.8 (2005), -5.5 (2006)
  - Net external liabilities (percent of GDP): 53.5 (2003), 55.4 (2004), 56.9 (2005), 60.3 (2006)
  - Net external debt (percent of GDP): 45.5 (2002), 47.7 (2003), 50.3 (2004), 52.4 (2005), 52.6 (2006)
  - Household debt approaching 160 percent of disposable income; debt servicing approaching 12 percent of disposable income (authorities’ indicators to monitor).

### Financial system soundness and FSAP issues
- Australia’s financial system is healthy, profitable, and well placed to cope with shocks.
- Supervisory authorities are alert to potential vulnerabilities, including heavy reliance on international capital and wholesale markets for funding, cross-border vulnerabilities with the banking system in New Zealand, and large exposure of banks and other lenders to households.
- Household indicators to monitor:
  - Household debt approaching 160 percent of disposable income.
  - Debt servicing approaching 12 percent of disposable income.
  - House prices picking up again.
- The sub-prime loan market in Australia is very small and dominated by specialized non-bank institutions.
- APRA is maintaining supervisory efforts to ensure banks’ awareness of risks from “low doc” and high loan-to-value ratio loans.
- Supervisory authorities have endorsed the key recommendations of the Financial Sector Assessment Program (FSAP).
- Table 8 (FSAP key recommendations and progress) — selected items:
  - Banking: Basel II framework scheduled for January 2008; four largest banks expected to adopt the advanced approach for credit risk; safeguards to phase in any capital reduction.
  - Failure resolution and crisis management: proposed Financial Claims Compensation Scheme under consideration; design changes suggested.
  - Supervisory capacity: additional funding allocated to ASIC and APRA to strengthen resources and IT systems.
  - Cooperation with New Zealand regulators: legislative changes formalized requirement to be alert to each others’ interests in times of stress (in force December 2006).
  - AML/CFT: AML/CFT Act adopted in December 2006; implementation proceeding in line with the adopted 24-month schedule.

### Fiscal policy, long-term sustainability, and reforms
- Commonwealth recorded surpluses in 9 of the last 10 years; net government debt was eliminated in 2006.
- Commonwealth underlying cash surplus for 2006/07 (fiscal year ending June) is estimated at 1.3 percent of GDP (staff estimate) and preliminary estimates indicate an underlying cash surplus of 1.7 percent of GDP in 2006–07 (Executive Board PIN).
- The 2007/08 Budget projects the underlying cash surplus to decline to 1 percent of GDP and remain at that level in the medium term.
- Recent surpluses used to repay government debt and save through the Future Fund; some revenue gains from rising TOT have been used for expenditures and tax cuts aimed at raising potential growth.
- Staff recommended keeping this year’s expenditure to the current budget plan even if revenues run ahead of projections to avoid additional short-term stimulus.
- States are collectively forecasting a fiscal deficit of around ½ percent of GDP in 2007/08, mainly reflecting a catch up in infrastructure spending.
- Long-term fiscal sustainability:
  - The second Intergenerational Report (IGR) (April 2007) shows improvement since 2002 due to surpluses, elimination of net debt and establishment of the Future Fund.
  - The long-term financing gap is forecast to reach 3½ percent of GDP by 2047.
  - The projected rise in healthcare cost is the predominant contributor to the gap.
  - Measures in place to better control spending on health include the Pharmaceutical Benefit scheme; further efforts needed.
- Staff urged continued fiscal restraint and careful handling of additional revenues stemming from further terms of trade gains.
- Executive Directors recommended allowing the surplus to exceed budget forecasts if growth and revenues are stronger than expected.

### Productivity, National Reform Agenda, and structural measures
- Staff support advancing the National Reform Agenda (NRA) to spur efficiency and enhance productivity and income growth.
- NRA priorities include:
  - boosting competition in transport, energy, and infrastructure;
  - reducing the regulatory burden imposed by the three levels of government;
  - improving human capital.
- Staff research links Australia’s strong productivity performance over the past 16 years to a wide range of labor and product market reforms.
- Productivity tables and reform impacts:
  - Multi-Factor Productivity (MFP) levels presented by industry (selected examples preserved verbatim in source).
  - Impact of structural reforms summarized as: Product Market reforms — "Positive, small."; Labor Market reforms — "Positive, large."

### Supplementary information: Credit market turmoil and immediate macro response
- Credit market turbulence triggered large declines in Australian asset markets; asset prices have begun to show signs of recovery.
- Re-pricing of risk encouraged reversal of carry trade bets, triggering a decline in the Australian dollar from the peak reached in late July.
- One-month bank bill swap rate increased by about 50 basis points during turbulence; recently decreased by about 10 basis points as confidence recovered.
- Some Australian hedge funds experienced losses in July from exposure to U.S. subprime loans; these funds have total funds under management equal to 0.03 percent of total assets of Australia’s financial system.
- Australian banks’ exposure to both U.S. and Australian subprime mortgage loans is low.
- Rating agencies (Standard and Poor’s, Fitch) noted limited exposure and did not anticipate material problems for Australian banks.
- The RBA injected significant amounts of liquidity into the market in August; liquidity levels have begun to return to more normal daily levels.
- Staff’s tentative estimate: overall impact of market turbulence on Australian economy likely to be small; cost of funding has increased but strong profits, especially in mining, suggest investment is not likely to be significantly affected.
- Inflation outcomes cited: Headline CPI rose by 1.2 percent in the second quarter, and by 2.1 percent in the year to June. RBA’s measure of underlying inflation increased by 0.9 percent in the quarter.

### Key statistics and balance of payments highlights (selected tables and indicators preserved verbatim)
- Selected balance of payments figures (percent of GDP):
  - Current account balance: -5.4 (2003), -6.0 (2004), -5.8 (2005), -5.5 (2006), -5.6 (2007 proj.), -5.6 (2008 proj.)
  - Goods balance: -2.9, -2.8, -1.9, -1.3, -1.5, -1.6
  - Exports: 13.4, 13.6, 15.0, 16.5, 15.3, 14.7
  - Imports: -16.3, -16.4, -16.9, -17.8, -16.8, -16.3
  - Net income: -2.8, -3.3, -3.9, -4.2, -4.4, -4.6
  - Net external liabilities: 53.5, 55.4, 56.9, 60.3, 61.6, 63.8
  - Net external debt: 45.5, 47.7, 50.3, 52.4, 52.6, 54.5
- Key macro/fiscal indicators:
  - Nominal GDP (2006): $A 1,003 billion (US$ 756 billion)
  - GDP per capita (2006): US$ 35,583
  - Population (September 2006): 20.6 million
- Selected entries from Table 1 (Output and demand, percent change):
  - Real GDP: 3.1 (2003), 3.7 (2004), 2.8 (2005), 2.7 (2006), 4.4 (2007), 4.0 (2008) — as presented.
  - CPI inflation: 2.8 (2003), 2.3 (2004), 2.7 (2005), 3.5 (2006), 2.1 (2007), 2.8 (2008)
  - Unemployment rate: 5.9 (2003), 5.4 (2004), 5.1 (2005), 4.8 (2006), 4.5 (2007), 4.5 (2008)
- Table 3 (Medium-Term Scenario 2006–12) — select series preserved:
  - GDP: 3.7 (2006), 2.7 (2007), 4.4 (2008), 4.0 (2009), 3.4 (2010), 3.3 (2011), 3.2 (2012) — as presented.
  - CPI inflation: 2.5 (2006), 3.5 (2007), 2.1 (2008), 2.8 (2009), 2.8 (2010), 2.8 (2011), 2.8 (2012)
  - Commonwealth receipts (percent of GDP): 23.4, 23.0, 22.7, 22.4, 22.7, 22.9, 22.8, 22.8 (series as presented).
  - Net debt (Commonwealth, percent of GDP): 9.0, -0.6, -2.8, -1.1, -2.5, -3.7, -4.7, -5.7 (series as presented).

### IMF Executive Board conclusions (Public Information Notice No. 07/112, September 12, 2007)
- Preliminary estimates: Commonwealth government recorded an underlying cash surplus of 1.7 percent of GDP in 2006–07; surplus is 0.4 percent of GDP higher than expected in May.
- Most of the surplus to be transferred to:
  - Future Fund: 0.7 percent of GDP
  - Higher Education Endowment Fund: 0.6 percent of GDP
- 2007/08 budget projects underlying cash surplus to decline from 1.7 to 1 percent of GDP and remain at that level in the medium term.
- Directors commended authorities for exemplary macroeconomic management and solid fiscal, monetary, and structural policies.
- Directors noted the flexibility of the exchange rate is a valuable shock absorber and found no clear signs of misalignment once recent terms of trade gains are taken into account.
- Directors supported the National Reform Agenda and emphasized attention to health-care spending efficiency and prudent State/Territory infrastructure decisions.

*Source: _cr07314.*

### 1. Real Economic Indicators ............................................................................................

### 1. Real Economic Indicators

### I. Economic developments — key findings
- Real GDP expanded by 3¾ percent over the year to the first quarter of 2007.
- Non-farm GDP growth accelerated, while a severe drought reduced farm output, subtracting about ¾ of a percentage point in GDP growth in 2006/07.
- Growth was driven by domestic demand with consumer spending accelerating in the second half of the year, supported by rising employment and real wages.
- Headline and core inflation have eased recently in part reflecting temporary factors, particularly fuel and food prices.
- The current account deficit remained slightly above 5½ percent of GDP in 2006; historically Australia has run on average a deficit of about 4.5 percent of GDP.
- In 2006 the trade deficit narrowed owing to higher export prices and a modest lift in volumes; imports rebounded recently driven by firming domestic demand including strong imports of capital goods.
- The investment income balance continued to deteriorate, reflecting large net dividend payments particularly in the resource sector.
- Net foreign liabilities increased to over 60 percent of GDP.
- The private sector accounts for 99 percent of Australia’s net external debt, with 78 percent intermediated by private financial institutions.
- The surging Terms of Trade (TOT) have driven part of the expansion; TOT rose 40 percent in the last 4 years.

### I. Economic projections (Medium-Term Scenario 2006–12) — selected staff projections
- Real GDP: 2.7 (2006), 4.4 (2007), 4.0 (2008), 3.4 (2009), 3.3 (2010), 3.2 (2011), 3.2 (2012)
- Total domestic demand: 3.5 (2006), 5.1 (2007), 3.2 (2008), 3.0 (2009), 2.9 (2010), 2.8 (2011), 2.8 (2012)
- Exports of goods and services: 3.4 (2006), 6.1 (2007), 9.0 (2008), 6.8 (2009), 6.1 (2010), 6.1 (2011), 6.1 (2012)
- Imports of goods and services: 7.7 (2006), 9.5 (2007), 4.5 (2008), 4.3 (2009), 4.1 (2010), 3.9 (2011), 4.0 (2012)
- CPI inflation: 3.5 (2006), 2.1 (2007), 2.8 (2008), 2.8 (2009), 2.8 (2010), 2.8 (2011), 2.8 (2012)
- Unemployment rate: 4.8 (2006), 4.5 (2007), 4.5 (2008), 4.5 (2009), 4.5 (2010), 4.5 (2011), 4.5 (2012)
- Balance on goods and services (percent of GDP): -1.2 (2006), -1.1 (2007), -1.0 (2008), -1.2 (2009), -1.4 (2010), -1.4 (2011), -1.4 (2012)
- Balance on income and transfers (percent of GDP): -4.3 (2006), -4.4 (2007), -4.6 (2008), -4.4 (2009), -4.5 (2010), -4.3 (2011), -4.4 (2012)
- Current account balance (percent of GDP): -5.5 (2006), -5.6 (2007), -5.6 (2008), -5.6 (2009), -5.8 (2010), -5.7 (2011), -5.8 (2012)

### Short- and medium-term risks
- Short-term risks skew to the upside: pickup in housing starts, recovery in rural income with easing drought, and higher natural resource export volumes could raise growth and inflationary pressures.
- Medium-term risks are balanced: main sources include external developments (global slowdown or financial turbulence) and domestic factors (recurrent droughts, household balance sheet consolidation).
- If the global economy slows significantly, commodity prices could fall deeper and more rapidly than assumed, reducing exports, dampening investment, and slowing growth.
- Alternatively, commodity prices could continue to outperform expectations, putting upward pressure on an already stretched economy.

### II. Policy discussion — monetary policy
- The RBA raised the official interest rate by 25 basis points three times last year to 6¼ percent in view of tight capacity utilization and a build-up of inflationary pressures.
- Recent moderation in producer and consumer price indices and the appreciation of the Australian dollar have dampened inflation evidence, giving the RBA further time to assess the need for tightening.
- The RBA monitors domestic activity, household credit, and wage outcomes; a reemergence of inflationary pressure would call for prompt policy action.
- The Australian dollar appreciation reflects the surge in the TOT and strong capital inflows; available estimates for REER overvaluation range from 1 percent (RBA model) to 9 percent (two CGER estimates that account for a projected partial reversal of TOT gains). Footnote estimates cited CGER overvaluation figures of 9 percent (equilibrium real exchange rate), 9 percent (macroeconomic balance approach), and 18 percent (external sustainability approach).
- Staff judged there is no significant misalignment of the exchange rate once recent TOT gains are taken into account.
- The RBA lets market forces determine the exchange rate and has accumulated a modest amount of additional reserves with negligible market effect.

### II. Policy discussion — external stability and financial sector
- Net external liabilities reached 60 percent of GDP in 2006 and are projected to increase as high current account deficits persist over the medium term.
- The high deficits are primarily due to high domestic investment linked to attractive investment opportunities including vast natural resource reserves.
- The RBA argued growth in foreign liabilities is not a threat to external stability because borrowers are predominantly highly-rated banks, a significant portion of external debt is denominated in domestic currency or hedged, foreign currency assets exceed foreign currency liabilities, and Australia has deep, open financial markets.
- Staff concurred with the RBA’s assessment but cautioned that debt sustainability depends critically on a sound macroeconomic framework and sustained structural reform.

### II. Policy discussion — fiscal policy
- The Commonwealth recorded surpluses in 9 of the last 10 years; net government debt was eliminated in 2006.
- The Commonwealth underlying cash surplus for 2006/07 (fiscal year ending June) is estimated at 1.3 percent of GDP, higher than budgeted.
- The 2007/08 Budget targets continued surpluses despite further personal income tax cuts and new spending initiatives; the underlying surplus is projected to decline slightly to 1 percent of GDP and remain at that level in the medium term.
- The government has used recent surpluses to repay government debt and save through the Future Fund; some revenue gains from rising TOT have been used for expenditures and tax cuts aimed at raising potential growth.
- Staff recommended keeping this year’s expenditure to the current budget plan even if revenues run ahead of projections to avoid additional short-term stimulus.
- States are collectively forecasting a fiscal deficit of around ½ percent of GDP in 2007/08, reversing prior surplus positions; the deficit mainly reflects a catch up in infrastructure spending, which may put additional pressure on scarce human and capital resources and could bid up prices.

*Source: _cr07314 - 1. Real Economic Indicators.*

### 17.      Long-term fiscal sustainability has improved, reflecting reform efforts. The

### _cr07314 - 17.      Long-term fiscal sustainability has improved, reflecting reform efforts.

### Long-term fiscal sustainability
- The second Intergenerational Report (IGR) published in April 2007 shows that the fiscal position has improved since 2002, mainly by accumulating surpluses, eliminating net debt and establishing the Future Fund to provide for unfunded liabilities.
- Nevertheless, the long-term financing gap is forecast to reach 3½ percent of GDP by 2047.
- The projected rise in healthcare cost is the predominant contributor to the gap.
- A range of measures have been put in place to better control spending on health, such as the Pharmaceutical Benefit scheme, but further efforts will be needed.
- Continued attention to the efficiency and effectiveness of spending will be key to preserving long-term fiscal sustainability.

### National Reform Agenda and productivity
- Australia has shown that comprehensive market reforms can have a large payoff in terms of macroeconomic performance.
- The staff agrees with the authorities that this is the right time to push forward with the implementation of additional measures needed to spur efficiency and further enhance productivity and income growth.
- It is important to make progress on the National Reform Agenda (NRA), adopted last year as a follow-on to the earlier National Competition Policy reform program.
- The NRA aims at:
  - boosting competition in the areas of transport, energy, and infrastructure;
  - reducing the regulatory burden imposed by the three levels of government;
  - improving human capital.
- The greater focus on human capital and competition and regulatory reform is consistent with staff research showing that Australia's strong productivity performance over the past 16 years was aided by a wide range of labor and product market reforms.

### Environment and resource management
- The government is reducing the greenhouse emissions signature of the Australian economy and plans to introduce a new emissions trading system.
- Given increasing scarcity of water, the authorities are investing funds in a comprehensive plan to increase water use efficiency and address overallocation of water entitlements to provide greater water security for communities, industry, and the environment.

### Financial system soundness and vulnerabilities
- Australia’s financial system is healthy, profitable, and well placed to cope with shocks.
- Supervisory authorities are alert to potential vulnerabilities, including:
  - heavy reliance on international capital and wholesale markets for funding;
  - cross-border vulnerabilities with the banking system in New Zealand;
  - large exposure of banks and other lenders to households.
- Household indicators to monitor:
  - household debt approaching 160 percent of disposable income;
  - debt servicing approaching 12 percent of disposable income;
  - house prices picking up again.
- So far, incidence of defaults on mortgage loans remains low.
- The sub-prime loan market in Australia is very small and dominated by specialized non-bank institutions.
- The Australian Prudential Regulation Authority (APRA) is maintaining supervisory efforts to ensure banks’ awareness of risks from “low doc” and high loan-to-value ratio loans.
- Prudential supervision by APRA and market conduct supervision by the Australian Securities and Investments Commission are well established.
- Supervisory authorities have endorsed the key recommendations of the Financial Sector Assessment Program (FSAP).
- Authorities are working on formalizing the framework for failure resolution and crisis management; the proposed Financial Claims Compensation Scheme is a useful element of this framework.

### Staff appraisal: short-term outlook and policy recommendations
- Growth outlook and risks:
  - Staff project that growth will accelerate above 4 percent in 2007.
  - Core inflation is projected to stay around 2½ percent, well within the target band.
  - Main risk: growth could surprise further on the upside owing to recovery of rural income with the easing of the drought and a pickup in resource export volumes.
- Monetary policy:
  - The RBA has kept rates on hold since November.
  - Staff support this “wait-and-see” policy given recent data suggesting little urgency to raise interest rates.
  - Staff welcome the RBA stance that the political calendar will not influence the bank’s decision on interest rates.
- Fiscal policy:
  - Fiscal policy is appropriately focused on medium- and long-term objectives.
  - Australia’s fiscal position is strong and the 2007/08 budget targets continued surpluses, even with further personal income tax cuts and a number of spending initiatives.
  - Main concern: dealing with possible additional revenues stemming from further terms of trade gains.
  - Given the current situation and prospects, staff urge the government to continue exercising fiscal restraint.
- Exchange rate policy:
  - The market-oriented exchange rate policy is appropriate.
  - The Australian dollar has appreciated substantially over the past few years, but the exchange rate does not appear to be misaligned once the recent surge in the terms of trade is taken into account.
  - The appreciation has helped ease inflation pressures through lower import prices and by switching expenditure to imports when capacity utilization was high.
- Reform implementation:
  - Authorities are pushing forward with additional measures to spur efficiency, enhance productivity and income growth, and prepare for population aging.
  - The National Reform Agenda’s priorities are reiterated: competition in transport, energy, and infrastructure; reducing regulatory burden across government levels; and improving human capital.
- Financial sector resilience:
  - Australian banks are well capitalized and asset quality remains high.
  - Potential risks, including heavy exposure to highly indebted households, warrant close monitoring of household finances.
  - Staff welcome the proposed Financial Claims Compensation Scheme as a useful element of the failure resolution framework.

*Source: _cr07314 - 17.      Long-term fiscal sustainability has improved, reflecting reform efforts.*

### 28.      It is proposed that the next Article IV consultation with Australia take place on the

### _cr07314 - 28.      It is proposed that the next Article IV consultation with Australia take place on the standard 12-month cycle.

### Real economy and demand
- Australia has experienced "more than 15 years of growth."
- The commodity boom is a driving force with "terms of trade rising to 50-year highs."
- Real GDP growth (quarterly and annual series shown for 1997–2006 in figure): charted range includes values from -2 to 8 (quarterly percentage change and annual percentage change axes).
- Domestic demand components (percent change in 4-quarter total) show strong earlier business investment followed by signs it "appears to have peaked" (series for 2002–2007 with axis from -15 to 30).
- Household consumption "has picked up again" with real household consumption and real household disposable income (year-ended percentage change series for 1994–2006 with axis from -2 to 10).
- Retail sales and consumer confidence: retail sales (year on year percentage change of three month moving average) and consumer sentiment (index) series for 1995–2007 (retail sales axis 0–10; sentiment index 70–140).

### Inflation, capacity, and labor market
- "The Australian economy is bumping up against capacity contraints."
- Capacity Utilization Rate (seasonally adjusted) series for 1997–2007 with axis 72–90.
- Labor market conditions: unemployment and vacancies series (percent of labor force) for 1981–2006 (axes 0–12 and 0.0–2.0 for vacancies).
- "Labor market conditions are tight... however overall wage movements have been reasonably restrained." Private sector wages by sector (construction, mining, total) show percent change (y/y) for 2001–2007 with axis 2–7.
- "Productivity growth has lost ground." Trend labor productivity growth (percent, 5-year average) shown for 1985–2007 with axis 0–4.
- Despite high capacity utilization, "headline inflation has fallen," with CPI inflation series (2000–2006) showing Headline CPI, Excluding volatile items, and Core CPI (axes 1–7).
- CPI inflation decomposition shows Tradables, Nontradables, Overall (2002–2007 series with axis -1 to 5).

### External developments and balance of payments
- "The current account deficit is being driven by net investment income."
- Current Account Balance (in percent of GDP) series for 1999–2006 with axis -8 to 4.
- Trade in goods and services: exports and imports annual percentage change series for 1998–2006 (axes -20 to 40).
- "Export growth has been held back by the slow expansion of mining supply capacity and by the drought."
- Export volumes by category (Total, Nonrural goods, Services, Rural goods) percent change in 4-quarter totals for 2002–2007 (axis -20 to 25).
- Real exchange rate and commodity prices: Export Commodity Price in SDR, 2001/02=100 and Terms of Trade Index, 2004/05=100; Real Effective Exchange Rate, 2000=100 (series for 1986–2006).
- "Capital inflows into Australia remain strong. Net foreign debt has increased, all on the account of the private sector." Net capital inflows (4-quarter moving average, percent of GDP) shown for 1996–2007 (axis -4 to 10). Net foreign debt (percent of GDP) series 1989–2007 (axis -10 to 70).

- Selected balance of payments figures (Table 2, in percent of GDP):
  - Current account balance: -5.4 (2003), -6.0 (2004), -5.8 (2005), -5.5 (2006), -5.6 (2007 proj.), -5.6 (2008 proj.)
  - Goods balance: -2.9, -2.8, -1.9, -1.3, -1.5, -1.6
  - Exports: 13.4, 13.6, 15.0, 16.5, 15.3, 14.7
  - Imports: -16.3, -16.4, -16.9, -17.8, -16.8, -16.3
  - Net income: -2.8, -3.3, -3.9, -4.2, -4.4, -4.6
  - Net external liabilities: 53.5, 55.4, 56.9, 60.3, 61.6, 63.8
  - Net external debt: 45.5, 47.7, 50.3, 52.4, 52.6, 54.5
  - Gross official reserves (A$ billion) memoranda: 44.3, 47.4, 59.0, 69.6 (and later entries as provided)

### Financial markets and asset prices
- RBA raised rates 3 times in 2006; mortgage rates adjusted accordingly. Nominal interest rates series (1996–2006) show cash rate and mortgage rate (floating) with axis 0–10.
- Inflation expectations moderated in late 2006 but have begun to pick up (series 1996–2006 with axis 1.0–5.0).
- Exchange rates: AUD appreciated against US$ and JPY and held steady against EUR. Bilateral exchange rates series (1999–2007) plot US$/$A, Euro/$A, Yen/$A.
- US/AU$ and VIX series plotted (dates in 2005–2007) and US/AU$ exchange rate shown on inverted scale.
- Asset prices: Stock Market Index (ASX) and House Price Index annual percentage change quarterly series for 1994–2006 (axis -20 to 30).
- Credit indicators: Total credit and household credit percent change (y/y) series for 2002–2006 (axis 5–25).

### External debt sustainability scenarios
- Figure 5 shows gross external debt in percent of GDP with multiple scenario-bound tests (baseline and shocks).
- Notes on scenarios:
  - Individual shocks are permanent one-half standard deviation shocks.
  - Combined shock 2/ uses permanent 1/4 standard deviation shocks applied to real interest rate, growth rate, and current account balance.
  - Real depreciation shock 3/ involves a one-time real depreciation of 30 percent in 2007 with foreign exchange hedging covering 79 percent of foreign currency debt (consistent with the ABS survey as reported in "Australia's Foreign Currency Exposure and Hedging Practices," RBA Bulletin, December 2005).
- Baseline and scenario box figures in the chart include historical average and scenario averages (example numeric labels appearing: Baseline: 108; Historical: 92; Combined shock box figures 112, 108, etc.; growth and CA shock box labels include Baseline: 3.1, 3.3, 3.8 and Baseline: -2.9, Scenario: -3.5, Historical: -2.1).

### Fiscal position and public finances
- "Fiscal position remains strong, reflecting in part strong revenue growth resulting from rising terms of trade in recent years."
- Commonwealth revenue and expenses (percent of GDP) series in Figure 6 across fiscal years 00/01–10/11 with revenues and expenses around 20–25 percent of GDP.
- Fiscal balance (accrual basis) series shows slight decline in 2006/07 and 2007/08 but "remains around 1 percent of GDP in the medium term." Fiscal balance axis from -1.0 to 2.5.
- "Aided by fiscal surpluses, net debt of the Commonwealth government was eliminated in 2006." Public sector debt (net) series shown 00/01–10/11 with axis -10 to 20.

- Key fiscal and macro indicators (selected from table entries):
  - Nominal GDP (2006): $A 1,003 billion (US$ 756 billion)
  - Quota (in millions): SDR 3,236
  - GDP per capita (2006): US$ 35,583
  - Population (September 2006): 20.6 million
- Table 1: Selected Economic Indicators, 2003–08 (selected rows preserved verbatim formatting):
  - Output and demand (percent change)
    - Real GDP3.13.72.82.74.44.0
    - Total domestic demand5.75.64.33.55.13.2
    - Private consumption3.65.73.03.14.53.8
    - Total investment9.17.67.76.55.73.3
    - Business13.812.615.68.99.53.5
    - Dwelling6.33.0-3.8-1.56.23.0
    - Exports of goods and services-1.24.32.33.46.19.0
    - Imports of goods and services11.115.08.97.69.54.5
  - Inflation and unemployment (in percent)
    - CPI inflation2.82.32.73.52.12.8
    - Unemployment rate5.95.45.14.84.54.5
  - Saving and investment (in percent of GDP)
    - Gross national saving 20.620.120.820.621.721.0
    - General government saving4.03.43.83.92.72.8
    - Private saving 1/16.616.616.916.819.018.2
    - Gross capital formation25.926.026.726.627.226.6
  - Fiscal indicators (in percent of GDP) 2/
    - Receipts  3/22.622.322.723.022.722.4
    - Payments  3/21.621.321.221.321.221.1
    - Underlying balance 3/1.01.01.51.61.31.0
    - Net debt3.92.81.4-0.6-2.8-1.1
  - Money and credit (end of period)
    - Interest rate (90-day bill, in percent)  4/5.55.45.66.46.4...
    - Treasury bond yield (10-year, in percent)  4/5.65.35.25.96.3...
    - M3 (percent change)  4/11.79.08.213.116.1...
    - Private domestic credit (percent change)  4/12.514.113.514.214.5...
  - Balance of payments (in percent of GDP)
    - Current account-5.4-6.0-5.8-5.5-5.6-5.6
      - of which: Trade balance-2.9-2.8-1.9-1.3-1.5-1.6
    - Foreign direct investment, net-1.63.9-0.30.2-0.40.0
  - Terms of trade (percent change)3.29.311.77.83.5-3.7
  - External assets and liabilities (in percent of GDP)
    - Net external liabilities53.555.456.960.361.663.8
    - Net external debt45.547.750.352.452.654.5
  - Exchange rate (period average)
    - US$/$A  4/0.650.740.760.750.82...
    - Trade-weighted index  4/57.862.363.963.066.6...
    - Real effective exchange rate  5/112.6121.2124.8124.7128.9...

### Medium-term outlook and projections
- Table 3: Medium-Term Scenario 2006–12 (select series preserved):
  - Real economic indicators (percent change)
    - GDP3.72.74.44.03.43.33.23.2
    - Total domestic demand4.53.55.13.23.02.92.82.8
    - Private consumption3.93.14.53.83.53.02.72.7
    - Total investment6.66.55.73.33.02.82.82.9
    - CPI inflation2.53.52.12.82.82.82.82.8
    - Unemployment rate6.74.84.54.54.54.54.54.5
  - Saving and investment (percent of GDP)
    - Gross national saving20.020.621.721.020.419.919.719.3
    - General government saving3.23.92.72.82.92.82.72.6
  - Commonwealth Budget (percent of GDP)
    - Receipts23.423.022.722.422.722.922.822.8
    - Payments22.921.321.221.121.321.521.621.6
    - Underlying balance (cash basis) 3/0.41.61.31.01.11.21.01.0
    - Net debt 4/9.0-0.6-2.8-1.1-2.5-3.7-4.7-5.7
  - Balance of payments (percent of GDP)
    - Current account balance-4.3-5.5-5.6-5.6-5.6-5.8-5.7-5.8

### Fiscal accounts (2003/04–2010/11) and public sector details
- Table 4: Fiscal Accounts (selected accrual and cash basis figures):
  - Commonwealth government revenue (percent of GDP) across 2003/04–2007/08: 22.4, 23.0, 23.0, 22.8, 22.5, 22.8, 23.1, 22.9 (as presented)
  - Tax share and income tax subcomponents: Income tax series include 17.3, 18.2, 18.2, 18.3, 18.1, 18.4, 18.7, 18.6 (individuals and withholdings: 11.8, 12.1, 11.8, 11.4, 10.9, 11.0, 11.3, 11.5)
  - Expenses, by category (percent of GDP): Salaries and wages ~1.3; Goods and services 4.6–5.2; Current transfers ~12.7–13.4; Net capital investment ~0.1–0.2.
  - Fiscal balance (accrual basis) 0.6, 1.2, 1.5, 1.2, 0.9, 1.0, 1.2, 1.1 (2003/04–2010/11 entries as presented).
  - Underlying cash balance (Commonwealth) 1.0, 1.5, 1.6, 1.3, 1.0, 1.1, 1.2, 1.0 (as presented).
  - Commonwealth government net debt: 2.8, 1.4, -0.6, -2.8, -1.1, -2.5, -3.7, -4.7 (2003/04 onward series as presented).
  - Memorandum: Commonwealth government net worth -4.7, -3.4, -2.4, -1.1, -0.1, 1.2, 2.4, 3.5.

### Productivity performance and structural reforms
- Table 5: Productivity Performance of Australian Industries (Multi-Factor Productivity Levels in percent of U.S. MFP levels) includes industry rows with values for selected years (examples as presented):
  - Agriculture86.9369.9157.1764.32
  - Mining93.57110.49107.03102.89
  - Total Manufacturing89.3172.8852.1248.39
  - Electricity, gas & water supply89.79117.13135.69123.10
  - Construction75.8471.2088.17113.34
  - Wholesale & retail trade71.7669.9571.2572.45
  - Transport & Storage163.40103.0689.2585.77
  - Business services109.79100.3986.2192.66
- Table 6: Impact of Structural Reforms on Australia's Productivity Performance summarizes major reforms and estimated impacts on MFP:
  - Product Market reforms (National Reform Agenda; reducing anti-competitive barriers; simplifying regulations; enhancing human capital) — Impact: "Positive, small."
  - Labor Market reforms ("Workchoices" and other measures) — Impact: "Positive, large."
  - Infrastructure reforms (deregulation in transport, telecommunications; commercialization, corporatization and privatization of state-owned firms; National Competition Policy; trade liberalization) — Impact: (noted in table as part of product market / infrastructure reforms).

*Source: _cr07314 - 28.*

### Introduction of enterprise bargaining agreements.

### Introduction of enterprise bargaining agreements.

### Employment reforms and enterprise bargaining
- Coalition Government reforms introduced the possibility of individual contracts, and expanded the use of enterprise bargaining agreements.
- Reported effects on unspecified outcomes in the source:  
  - Positive, large  
  - Positive, not significant  
  - Positive, large  
  - No significant effect  
  - No significant effect  
  - Positive, large

### Indicators of External and Financial Vulnerability (Table 7: Australia, 2002–06)
- Real exports of goods (percent change): 2002: 0.5; 2003: -1.5; 2004: 3.9; 2005: 2.3; 2006: 3.2
- Real imports of goods (percent change): 2002: 13.7; 2003: 12.3; 2004: 14.4; 2005: 9.8; 2006: 8.7
- Terms of trade (percent change): 2002: 2.2; 2003: 3.2; 2004: 9.3; 2005: 11.7; 2006: 7.8
- Current account balance (percent of GDP): 2002: -3.8; 2003: -5.4; 2004: -6.0; 2005: -5.8; 2006: -5.5
- Capital and financial account balance (percent of GDP): 2002: 4.0; 2003: 5.4; 2004: 6.0; 2005: 5.8; 2006: 5.5
- Of which: Net portfolio investment (percent of GDP): 2002: 0.1; 2003: 7.5; 2004: 2.4; 2005: 5.3; 2006: 7.0
- Of which: Net direct investment (percent of GDP): 2002: 2.2; 2003: -1.6; 2004: 3.9; 2005: -0.3; 2006: 0.2
- Total reserves (US$ billion): 2002: 21.6; 2003: 33.3; 2004: 36.9; 2005: 43.3; 2006: 55.1
- In months of imports of goods and services: 2002: 2.8; 2003: 2.9; 2004: 2.9; 2005: 3.2; 2006: 3.7
- Total net reserves (US$ billion): 2002: 7.4; 2003: 13.5; 2004: 19.5; 2005: 21.0; 2006: 24.3
- Net international investment position (percent of GDP): 2002: -51.6; 2003: -53.5; 2004: -55.4; 2005: -56.9; 2006: -60.3
- Of which: Net external public sector debt (percent of GDP): 2002: 2.0; 2003: 0.9; 2004: 1.6; 2005: 1.0; 2006: 0.2
- Of which: Net external private sector debt (percent of GDP): 2002: 44.5; 2003: 44.6; 2004: 46.2; 2005: 49.3; 2006: 52.1
- Net interest payments to exports (in percent): 2002: 8.3; 2003: 7.9; 2004: 9.1; 2005: 8.9; 2006: 10.4
- Nominal effective exchange rate (percent change): 2002: 3.1; 2003: 10.8; 2004: 7.5; 2005: 2.5; 2006: -1.2

Financial market and banking indicators:
- General government gross debt (percent of GDP): 2002: 14.3; 2003: 12.5; 2004: 11.3; 2005: 10.4; 2006: 9.4
- Interest rates (percent end-year):
  - 3-month T-bill: 2002: 4.8; 2003: 5.5; 2004: 5.4; 2005: 5.6; 2006: 6.4
  - 3-month T-bill, real: 2002: 1.7; 2003: 2.7; 2004: 3.0; 2005: 2.9; 2006: 2.8
  - 3-month interest rate spread vis-à-vis US: 2002: 3.2; 2003: 4.5; 2004: 4.0; 2005: 2.4; 2006: 1.6
- Stock market index (ASX, percent change, end-year): 2002: -11.4; 2003: 11.1; 2004: 22.6; 2005: 16.2; 2006: 19.9

Capital adequacy and asset quality:
- Regulatory capital to risk-weighted assets: 2002: 9.8; 2003: 10.1; 2004: 10.5; 2005: 10.4; 2006: 10.4
- Tier I capital to risk-weighted assets 1/: 2002: 7.7; 2003: 7.5; 2004: 7.6; 2005: 7.6; 2006: 7.4
- Impaired assets to total assets: 2002: 0.6; 2003: 0.4; 2004: 0.3; 2005: 0.2; 2006: 0.2
- Specific provisions to impaired assets: 2002: 35.3; 2003: 38.9; 2004: 41.4; 2005: 37.0; 2006: 37.4

Loans composition (share of total):
- Public sector: 2002: 3.6; 2003: 2.5; 2004: 2.2; 2005: 1.5; 2006: 1.4
- Individuals: 2002: 59.4; 2003: 62.5; 2004: 62.5; 2005: 62.3; 2006: 60.4
- Housing loans: 2002: 50.8; 2003: 53.9; 2004: 53.6; 2005: 53.8; 2006: 51.9
- Investor housing: 2002: 15.9; 2003: 18.2; 2004: 18.4; 2005: 18.2; 2006: 17.2
- Commercial lending: 2002: 37.0; 2003: 35.0; 2004: 35.7; 2005: 36.3; 2006: 38.2
- Financial intermediaries: 2002: 7.0; 2003: 6.4; 2004: 7.8; 2005: 7.5; 2006: 8.8
- Non-financial sector: 2002: 30.0; 2003: 28.6; 2004: 27.9; 2005: 28.8; 2006: 29.4

Sources for Table 7: Authorities data and Fund staff estimates.
Note 1/: Tier I capital includes issued and fully paid common equity and perpetual non-cumulative preference shares, and disclosed reserves.

### Financial Sector Assessment Program: Key Recommendations and Progress (Table 8)
- Banking
  - Key recommendation: Continue to ensure strong risk management practices, including through regular stress testing.
  - Progress: The Basel II framework is scheduled to be implemented in January 2008, with regular stress testing forming an important element of the framework. The four largest banks are expected to adopt the advanced approach with respect to credit risk, and supervisors have appropriately put safeguards in place to ensure that the reduction in banks’ capital is phased in.
- Failure Resolution and Crisis Management
  - Key recommendation: Continue to develop a formal process to manage the failure of individual institutions and more widespread crises.
  - Progress: The proposed Financial Claims Compensation Scheme is intended to provide depositors in a failed authorized deposit-taking institution (ADI) with a timely access to at least some of their funds, and policyholders of a failed general insurer with a right to have claims met. A number of changes to the design of the scheme as originally proposed have been suggested, and the amended scheme is now under consideration by the government.
- Supervisory Capacity
  - Key recommendation: Ensure that the supervisory agencies have adequate resources and flexibility.
  - Progress: In 2007, the government allocated additional funding to support the Australian Securities and Investments Commission (ASIC), in particular to fund a better regulation initiative program, and to streamline the corporate register. The government also allocated additional funding for the development of the ASIC’s information technology systems over the next four years. In addition, in the 2007/08 Budget, APRA received additional funding to assist it to retain high quality staff.
- Cooperation with New Zealand Regulators
  - Key recommendation: Build on the progress made within the Trans-Tasman Council on Banking Supervision to improve coordination in crisis management.
  - Progress: Recent legislative changes formalized a requirement on regulators in the two countries to be alert to each others’ interests in times of stress. These changes came into force in both countries in December 2006. With legislation in place, the work of the Trans-Tasman Council will now focus more on the practical aspects of coordination in crisis management.
- AML/CFT
  - Key recommendation: Give high priority to make the appropriate legislative and operational arrangements in the AML/CFT area.
  - Progress: The AML/CFT Act was adopted in December 2006. This first tranche of reforms covers the activities of financial service providers, gambling services and bullion dealers. Implementation is proceeding in line with the adopted 24-month schedule. Work is underway on developing legislation for the second tranche of legislative and regulatory reforms intended to capture designated non-financial businesses and professionals.

Source for Table 8: IMF Staff.

### Australia—Fund relations and statistical issues (Annex I & II)
- Membership status: Joined: August 5, 1947; Article VIII.
- Quota and SDR holdings (SDR Million, Percent Quota):
  - Quota: 3,236.40 (100.0)
  - Fund holdings of currency: 2,990.75 (92.41)
  - Reserve position in Fund: 246.03 (7.60)
- SDR Department (SDR Million, Percent Allocation):
  - Net cumulative allocation: 470.55 (100.00)
  - Holdings: 127.70 (27.14)
- Outstanding Purchases and Loans: None
- Financial Arrangements: None
- Projected Obligations to Fund: None
- Exchange rate arrangement: Australia has accepted the obligations of Article VIII, Sections 2, 3 and 4; exchange rate is independently 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; two main restrictions on foreigners require authorization for significant ownership of Australian corporations and approval for acquisition of real estate.
- Article IV consultation: Australia is on the 12–month consultation cycle. The 2006 Article IV consultation discussions were held during June 1-9, 2006; Executive Board concluded consultation on October 11, 2006.
- FSAP participation: FSAP missions took place during November 30-December 14, 2005, and March 26-April 12, 2006. FSSA and related assessments were published as Country Reports No. 06/372, No. 06/415, and No. 06/437.
- Fourth Amendment: Australia has accepted the Fourth Amendment to the Articles of Agreement.

Statistical issues:
- Australia publishes a wide array of economic and financial data; subscribed to the Special Data Dissemination Standard (SDDS).
- STA engaged with Australian authorities in September 2006 to encourage reporting monetary data using standardized report forms (SRFs) introduced in October 2004.

Table of Common Indicators Required for Surveillance (As of July 23, 2007) — selected entries:
- Exchange Rates: Date of Latest Observation: 07/23/07; Date Received: 07/23/07; Frequency of Data/Reporting/Publication: D D D
- International Reserve Assets and Reserve Liabilities of the Monetary Authorities: Date of Latest Observation: 05/07; Date Received: 06/29/07; Frequency: M M M
- Reserve/Base Money: 06/07; Date Received: 07/14/07; Frequency: M M M
- Broad Money: 05/07; Date Received: 06/29/07; Frequency: M M M
- Central Bank Balance Sheet: 06/07; Date Received: 07/16/07; Frequency: M M M
- Consolidated Balance Sheet of the Banking System: 05/07; Date Received: 07/18/07; Frequency: M M M
- Interest Rates: 07/23/07; Date Received: 07/23/07; Frequency: D D D
- Consumer Price Index: Q1 2007; Date Received: 04/24/07; Frequency: Q Q Q
- Revenue, Expenditure, Balance and Composition of Financing – General Government: 2005/06; Date Received: 10/06; Frequency: A A A
- External Current Account Balance: Q1 2007; Date Received: 06/05/07; Frequency: Q Q Q
- Gross External Debt: Q1 2007; Date Received: 06/05/07; Frequency: Q Q Q

Notes on frequency codes: Daily (D), Weekly (W), Monthly (M), Quarterly (Q), Annually (A), Irregular (I); Not Available (NA).

### Supplementary information to the 2007 staff report: Credit market turmoil and macroeconomic outlook
- Credit market turmoil and asset markets
  - The turbulence in the credit markets has triggered large declines in Australian asset markets; asset prices have begun to show signs of recovery.
  - The re-pricing of risk encouraged investors to reverse carry trade bets, triggering a decline in the Australian dollar from the peak reached in late July.
  - Stock market index fell, and short-term interest rates (one-month bank bill swap rate) increased by about 50 basis points during turbulence; more recently the one-month bank bill swap rate decreased by about 10 basis points as confidence recovered.
  - Metal prices fell during the turbulence but have partially rebounded; market analysts expect metal prices will remain high on continuing demand in the near future.
- Direct impact on Australia
  - Some Australian hedge funds experienced losses in July from exposure to U.S. subprime loans; these funds have total funds under management equal to 0.03 percent of total assets of Australia’s financial system.
  - Australian banks’ exposure to both U.S. and Australian subprime mortgage loans is low.
  - Standard and Poor’s stated that the credit quality of short-term debt sold by Australian banks will not be “adversely affected” by U.S. subprime losses, and that none of the companies set up by Australian banks to sell asset-backed commercial paper are exposed to U.S. residential mortgage assets.
  - Fitch Ratings noted limited exposure to the U.S. subprime market and did not anticipate material problems for Australian banks.
  - The Reserve Bank of Australia injected significant amounts of liquidity into the market in August; liquidity levels have begun to return to more normal daily levels.
- Macroeconomic projections and monetary policy
  - Staff’s macroeconomic projections remain broadly unchanged; tentative estimate that overall impact of market turbulence on Australian economy is likely to be small.
  - Cost of funding for the economy has increased, but strong profits, especially in mining, suggest investment is not likely to be significantly affected.
  - Inflation outcomes: Headline CPI rose by 1.2 percent in the second quarter, and by 2.1 percent in the year to June. RBA’s measure of underlying inflation increased by 0.9 percent in the quarter, higher than 0.5-0.6 percent in December and March quarters.
  - On August 8, 2007, the RBA raised the official interest rate from 6¼ percent to 6½ percent.
  - Staff considers the rate decision appropriate given the rise in medium-term inflation prospects and concurs that growth prospects remain strong as high commodity prices provide stimulus to national income and savings.

### Fiscal policy
- (Section heading present in source; substantive fiscal policy text not included in the supplied content.)

*Source: _cr07314 - Introduction of enterprise bargaining agreements., Staff Report for the 2007 Article IV Consultation—Informational Annex, and Supplementary Information (IMF).*

### 8.      Preliminary estimates indicate that the Commonwealth government recorded an

### IMF Executive Board Concludes 2007 Article IV Consultation with Australia

### Fiscal position
- Preliminary estimates indicate the Commonwealth government recorded an underlying cash surplus of 1.7 percent of GDP in 2006–07 (fiscal year ending June).
- The surplus is 0.4 percent of GDP higher than expected in May at the time of the 2007–08 Budget.
- Most of the surplus will be transferred to:
  - Future Fund: 0.7 percent of GDP
  - Higher Education Endowment Fund: 0.6 percent of GDP
- The 2007/08 (July 2007-June 2008) budget projects the underlying cash surplus to decline from 1.7 to 1 percent of GDP, and to remain at that level in the medium term.
- Fiscal indicators (in percent of GDP, fiscal year ending June 30):
  - Receipts: 22.7 (2007)
  - Payments: 21.2 (2007)
  - Underlying balance: 1.3 (2007)
  - Net debt: -2.8 (2007)
  - Note: Table values for earlier years are provided in the source.

### Macroeconomic outlook and growth
- Australia has experienced more than 15 years of continuous economic growth; after a modest slowdown, growth expanded to 3¾ percent over the year to March 2007.
- Staff project GDP growth to accelerate above 4 percent in 2007 and moderate in 2008.
- Table: Real GDP (percent change) — 4.4 (2007, Proj.)
- Total domestic demand (percent change) — 5.1 (2007, Proj.)
- Private consumption (percent change) — 4.5 (2007, Proj.)
- Total investment (percent change) — 5.7 (2007, Proj.)
  - Business investment — 9.5 (2007, Proj.)
  - Dwelling investment — 6.2 (2007, Proj.)

### Inflation, labor market, and monetary policy
- Inflation had eased in late 2006 and early 2007, but accelerated in the second quarter.
- Headline CPI inflation is expected to be slightly over 2 percent in 2007, and to stay in the upper half of the Reserve Bank of Australia’s target band thereafter.
- Table: CPI inflation — 2.1 (2007, Proj.)
- Unemployment rate — 4.5 (2007, Proj.)
- After being kept on hold since November 2006, monetary policy was tightened in August 2007 in response to renewed inflation pressure.
- Interest rates and yields (end of period / latest available month):
  - Interest rate (90-day bill) — 6.9 (2007)
  - Treasury bond yield (10-year) — 5.9 (2007)

### External sector and financial position
- The current account deficit was 5½ percent of GDP in 2006, reflecting high business investment.
- The trade deficit narrowed, while the investment income balance continued to deteriorate because of large net dividend payments.
- Net foreign liabilities increased to over 60 percent of GDP; table: Net external liabilities — 61.6 (2007).
- Table: Current account (in percent of GDP) — -5.6 (2007, Proj.)
- Terms of trade (percent change) — 3.5 (2007, Proj.)
- Directors agreed Australia’s external deficit appears sustainable but emphasized the need for continued careful monitoring of resulting debt.

### Financial sector and vulnerabilities
- Directors observed the financial sector is stable and well-capitalized; supervision is well-established and continues to be refined.
- Potential vulnerabilities identified by the 2006 Financial Sector Assessment Program (FSAP) remain, notably banks’ exposure to developments in the household sector.
- Australian banks’ exposure to U.S. subprime mortgage loans is low and the direct impact of recent credit market turbulence on Australia has been modest; continued vigilant monitoring of evolving market developments is warranted.

### Policy recommendations and assessment by Executive Directors
- Directors commended Australian authorities for exemplary macroeconomic management and solid fiscal, monetary, and structural policies.
- Recommended that, going forward, the surplus be allowed to exceed budget forecasts if growth and revenues are stronger than expected.
- Noted the continuing flexibility of the exchange rate is a valuable shock absorber; no clear signs of misalignment once recent terms of trade gains are taken into account.
- Supported the authorities’ National Reform Agenda focused on enhancing labor force participation and productivity.
- Emphasized continued attention to the efficiency of health-care spending and prudent decisions by State and Territory Governments on timing and extent of infrastructure investments.
- Welcomed the release of the second Intergenerational Report as a step to improve transparency and planning over the next 40 years.
- Welcomed the authorities’ efforts in advancing multilateral trade negotiations and their commitment to double Australia’s official development assistance by 2010.

*Public Information Notice (PIN) No. 07/112, September 12, 2007*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2007/_cr07314.pdf_