IMF Executive Board Concludes 2019 Article IV Consultation with Australia

IMF News, March 4, 2020

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Economic growth recovered gradually in 2019 from the lows in the second half of 2018, supported by accommodative fiscal and monetary policies.
Real GDP growth: 1.8 (2019); projections: 2.0 (2020), 2.4 (2021), 2.6 (2022).
Net exports contributed to growth in 2019 as Australia largely avoided global trade disruptions.
Headline and underlying inflation dipped below the Reserve Bank of Australia (RBA)’s target range of 2-3 percent.
Housing prices experienced a renewed pickup following a marked price correction during 2017-19.

Employment grew significantly in 2019, but relatively high unemployment and underemployment rates suggest persistent labor market slack.
Unemployment (percent of labor force): 6.1 (2015), 5.7 (2016), 5.6 (2017), 5.3 (2018).
Wages (nominal percent change): 1.9 (2018), 3.3 (2019).

Australian banks have remained adequately capitalized and profitable.
Underlying vulnerabilities include continued reliance on offshore wholesale funding and considerable loan concentration in residential mortgages.
The capital framework for banks has been further strengthened with a higher capital requirement for domestic systemically important banks from 2024.
Directors recommended priorities including:
- Encouraging a further lengthening of the maturity of banks’ wholesale funding.
- Implementing the APRA Capability Review’s recommendations.
- Reinforcing financial crisis management arrangements as highlighted in the 2018 FSAP.
- Strengthening the AML/CFT regime.
- Implementing Hayne Royal Commission recommendations and enhancing banks’ loss-absorbing capacity.

Directors commended sound macroeconomic management and strong policy frameworks underpinning resilience.
Near-term macroeconomic policy mix should remain accommodative.
Directors welcomed the expansionary fiscal policy stance in FY2019/20, driven by tax cuts and additional infrastructure spending.
Given Australia’s output gap and substantial fiscal space, Directors generally recommended avoiding a contractionary fiscal stance expected in FY2020/21, including by maintaining state-level infrastructure spending at current levels; some Directors emphasized preserving fiscal buffers against potential downside risks.
Directors supported the current monetary policy stance and highlighted that maintaining data-dependent accommodative monetary policy will help support the recovery of domestic demand.
Should downside risks materialize, Directors agreed authorities should be ready for a coordinated response, including fiscal stimulus jointly with both conventional and unconventional monetary policy measures.

Directors underscored that housing supply reforms remain critical for restoring affordability; recommended reforms include more efficient long-term planning, zoning, and local government reform, and a focus on infrastructure development.
Directors encouraged stepped-up structural reforms to support strong and inclusive growth, including:
- Strengthening business investment.
- Supporting SMEs’ access to finance.
- Pursuing product market deregulation.
- Introducing well-targeted tax incentives.
- Further increasing infrastructure spending while focusing on investment quality.
- Promoting innovation, increasing full-time female employment, and reducing youth underemployment.
Directors encouraged development of an ambitious, national, integrated approach to energy policy and climate change to reduce policy uncertainty and catalyze business investment.

Risks are tilted to the downside and had recently increased amid the coronavirus outbreak.
External risks: possible re-escalation of U.S./China trade tensions; sharp tightening of global financial conditions; near-term risks related to the recent coronavirus outbreak.
Domestic risks: further weakening of private consumption if cooling labor markets squeeze household income; adverse weather conditions, including a worsening of the bushfires, affecting consumption, tourism, and agriculture.
Upside/alternative domestic scenario: looser financial conditions could re-accelerate house price inflation, boosting private consumption but adding to medium-term vulnerabilities given high household debt levels.

Investment (percent of GDP) 1/: 25.9 (2015), 24.6 (2016), 24.2 (2017), 22.5 (2018), 22.3 (2019), 22.4 (2020), 22.7 (2021), 22.8 (2022).
Private investment (percent of GDP): 21.4 (2015), 19.7 (2016), 19.1 (2017), 19.0 (2018), 17.7 (2019), 17.3 (2020), 17.4 (2021), 17.6 (2022), 17.8 (2023), 17.9 (2024), 18.0 (2025).
House price index: 131 (2015), 141 (2016), 148 (2017), 140 (2018), 144 (2019), 149 (2020), 154 (2021), 159 (2022), 163 (2023), 168 (2024), 173 (2025).
Household debt (percent of disposable income) 2/: 180 (2015), 187 (2016), 185 (2017), 183 (2018), 181 (2019), 178 (2020), 175 (2021), 172 (2022), 170 (2023).
Gross debt (percent of GDP): 39.5 (2015), 41.0 (2016), 41.2 (2017), 41.7 (2018), 43.0 (2019), 42.7 (2020), 40.2 (2021), 38.7 (2022).
Nominal GDP (bn A$): 1,641 (2015), 1,703 (2016), 1,808 (2017), 1,899 (2018), 1,995 (2019), 2,060 (2020), 2,127 (2021), 2,209 (2022), 2,314 (2023), 2,427 (2024), 2,547 (2025).
Population (million): 24.0 (2015), 24.4 (2016), 24.8 (2017), 25.2 (2018), 25.6 (2019), 26.0 (2020), 26.4 (2021), 26.8 (2022), 27.2 (2023), 27.6 (2024), 28.0 (2025).

Source: IMF Executive Board Concludes 2019 Article IV Consultation with Australia, March 4, 2020.