IMF Executive Board Concludes 2022 Article IV Consultation with Australia
February 1, 2023
Washington, DC : The Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation [1] with Australia on January 25, 2023 and endorsed the staff appraisal without a meeting on a lapse-of-time basis. [2]
With a rapid post-pandemic economic recovery and favorable terms of trade, Australia has reached a stronger cyclical position than many other advanced economies, with limited scarring. While labor markets confront significant tightening, wage growth thus far has remained modest relative to many other advanced economies. Inflation has nonetheless risen to significantly above the RBA’s target, driven both by high commodity prices and strong domestic demand, prompting decisive monetary policy tightening. Fiscal policy consolidated significantly in FY2021/22 with the ending of pandemic-era support measures, and the pace of tightening is slowing significantly in the current fiscal year.
With tighter financial conditions, housing prices have started declining from their peak. While the financial sector faces significant exposure to housing markets, stability risks appear to remain well-contained, as banks have remained liquid and well-capitalized, while households have built substantial financial buffers. Pockets of vulnerability may nonetheless build up, for example among households that purchased their home recently at high valuations.
Australia’s economy is on a narrow path to a soft landing, with downside risks. Growth is expected to slow to 1.6 percent in 2023 from about 3.6 percent in 2022, as higher interest rates and weaker global growth cut into domestic demand and net exports. Inflation is projected to decelerate gradually toward the 2-3 percent inflation target by end-2024. Downside risks to the economic outlook dominate, with significant uncertainty regarding global growth, commodity prices, and domestic developments surrounding wages, housing prices, and the effect of tighter monetary conditions.
Executive Board Assessment
In concluding the 2022 Article IV consultation with Australia, Executive Directors endorsed the staff’s appraisal, as follows:
From its strong cyclical position, Australia’s economy is expected to come to a soft landing in 2023, although risks are skewed significantly to the downside. Tighter financial conditions, erosion of real incomes amid high inflation, declining housing prices, and soft global growth point to a significant deceleration in Australia. Inflation is projected to decline gradually but remains above target until 2024, subject to significant uncertainty. Downside risks to growth stem from a stronger global downturn, persistently high inflation expectations, and rising geo-economic fragmentation.
Restrictive macroeconomic policies are needed in the near term to mitigate strong domestic demand and address inflation . Monetary policy needs to continue tightening in the short term as envisaged, but given considerable uncertainty regarding the speed and intensity of monetary policy transmission, the pace of rate increases should continue to be data-dependent. Transparency in communication, underpinned by the assessment of the balance of risks, should continue to convey policy intentions to keep inflation expectations well anchored. Near-term fiscal restraint should support monetary policy in addressing demand. Budgetary revenue overperformance should be saved, and the implementation of spending programs should remain judicious, with any additional cost-of-living support amid high inflation to be kept temporary and well targeted to the vulnerable.
Implementing comprehensive tax reforms and improving efficiency in expenditure programs will pave the road for a credible consolidation path over the medium-term. Sizable structural spending pressures limit the degree of consolidation and risk crowding out important spending priorities. Reviewing existing, large spending programs and improving expenditure efficiency will be important to underpin medium-term fiscal consolidation. At the same time, there are opportunities to make the tax system more efficient and equitable, rebalancing it from currently high direct to indirect taxes, and raise sufficient revenues to fund the government programs. The Commonwealth Government should direct windfall revenue gains to budget repair, with a view to creating additional fiscal buffers to address future shocks.
Financial stability risks from the housing price correction appear to remain contained, and policies should aim to alleviate deteriorating housing affordability. With rising interest rates, housing prices are expected to continue declining significantly from their pandemic-era highs, but this is unlikely to raise material financial stability concerns given prudent lending standards and significant buffers among banks and households. Affordability concerns are increasing given strongly rising rents and higher mortgage rates. A strong focus on boosting housing supply remains essential, supported by well-targeted support for lower-income households.
Close monitoring of the financial system amid tightening financial conditions will still be important. The financial system appears to be robust, and the increase in banks’ required capital buffers is welcome. An expected increase in bank wholesale funding at a time of higher rates and slowing growth may pose some vulnerabilities, although liquidity coverage ratios are well above regulatory minimum requirements. Potential cyberthreats on financial infrastructure require adequate investment, close monitoring, and contingency planning. Close scrutiny of non-bank financial institutions is important given their rapid growth, albeit from a low base. Financial integrity regulation should be expanded to cover DNFBPs and enhance beneficial ownership transparency.
Australia’s new climate mitigation targets are welcome and should be supported with strong policy actions. The new 2030 Nationally Determined Contribution is broadly in line with the long-term goal of reaching net zero greenhouse gas emissions by 2050, and the new Climate Change Act creates a framework for accountability and future action to meet the target. A broad-based carbon price, coupled with measures to mitigate transition risks for impacted regions and industries, remains the most cost-effective way to achieve abatement goals. If political economy constraints prevent the adoption of an economy-wide carbon price, alternative sectoral policies, with price signals where possible, can help reduce emissions. In this context, planned reforms to the Safeguard Mechanism for industrial emissions are welcome. Adding price signals in the energy and transport sectors, potentially in the form of feebates, can further incentivize emissions reduction.
Reigniting productivity growth and boosting inclusion will require a strong focus on structural reforms. Delivering quality infrastructure to meet policy goals will require further streamlining the infrastructure pipeline and working proactively with the construction sector to overcome capacity constraints. Recent initiatives to tackle skill shortages, including free vocational training, expansion of university capacity, and a temporary increase in migration, are welcome. Scope remains to further boost innovation, promote competition, and improve education outcomes. Australia’s continued support for an open trade environment, including through reforms at the WTO, is very welcome.
[1] Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.
[2] The Executive Board takes decisions under its lapse-of-time procedure when the Board agrees that a proposal can be considered without convening formal discussions.
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Table. Australia: Main Economic Indicators, 2018-28 (Annual percentage change, unless otherwise Indicated) |
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|
2018 |
2019 |
2020 |
2021 |
2022 |
2023 |
2024 |
2025 |
2026 |
2027 |
2028 |
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|
Projections |
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|
NATIONAL ACCOUNTS |
||||||||||||
|
Real GDP |
2.8 |
1.9 |
-1.8 |
5.2 |
3.6 |
1.6 |
1.7 |
2.1 |
2.2 |
2.3 |
2.3 |
|
|
Domestic demand |
2.7 |
1.2 |
-2.2 |
6.0 |
4.9 |
2.0 |
1.6 |
2.0 |
2.2 |
2.3 |
2.3 |
|
|
Private consumption |
2.4 |
1.1 |
-5.8 |
5.0 |
6.8 |
2.5 |
2.2 |
2.7 |
2.7 |
2.8 |
2.8 |
|
|
Public consumption |
4.1 |
6.2 |
7.8 |
5.3 |
5.2 |
0.4 |
0.3 |
0.5 |
0.6 |
0.6 |
0.6 |
|
|
Investment |
2.3 |
-2.5 |
-2.8 |
10.4 |
1.5 |
2.4 |
1.7 |
1.9 |
2.7 |
2.8 |
2.8 |
|
|
Public |
2.7 |
2.1 |
-0.6 |
6.8 |
3.4 |
1.3 |
1.1 |
0.5 |
0.4 |
0.4 |
0.4 |
|
|
Private business |
2.6 |
-0.8 |
-3.8 |
8.9 |
4.1 |
4.8 |
2.0 |
2.4 |
3.8 |
3.9 |
3.7 |
|
|
Dwelling |
4.3 |
-7.2 |
-5.6 |
9.9 |
-2.7 |
0.9 |
1.6 |
2.0 |
2.4 |
2.6 |
2.8 |
|
|
Net exports (contribution to growth, percentage points) |
0.4 |
1.0 |
0.1 |
-1.4 |
-1.7 |
0.3 |
0.1 |
0.2 |
0.0 |
0.0 |
0.0 |
|
|
Gross domestic income |
3.3 |
3.2 |
-1.9 |
9.0 |
5.1 |
-0.2 |
0.3 |
2.0 |
2.1 |
2.3 |
2.3 |
|
|
Investment (percent of GDP) 1/ |
24.2 |
22.6 |
22.3 |
23.1 |
23.3 |
23.6 |
24.0 |
23.9 |
24.0 |
24.1 |
24.2 |
|
|
Public |
5.1 |
5.1 |
5.2 |
5.0 |
5.0 |
5.3 |
5.3 |
5.2 |
5.1 |
5.0 |
4.9 |
|
|
Private |
18.9 |
17.6 |
17.3 |
18.0 |
17.7 |
18.4 |
18.7 |
18.7 |
18.9 |
19.1 |
19.3 |
|
|
Savings (gross, percent of GDP) |
22.0 |
23.1 |
24.6 |
26.3 |
24.4 |
24.1 |
23.5 |
23.6 |
23.6 |
23.6 |
23.6 |
|
|
Households |
9.3 |
9.9 |
17.0 |
14.6 |
10.1 |
8.7 |
12.1 |
12.7 |
12.4 |
12.2 |
12.0 |
|
|
Potential output |
2.4 |
2.3 |
1.3 |
1.5 |
1.9 |
2.0 |
2.1 |
2.3 |
2.3 |
2.3 |
2.3 |
|
|
Output gap (percent of potential) |
-0.7 |
-1.0 |
-4.0 |
-0.5 |
1.1 |
0.8 |
0.4 |
0.2 |
0.0 |
0.0 |
0.0 |
|
|
LABOR MARKET |
||||||||||||
|
Employment |
2.7 |
2.3 |
-1.5 |
3.1 |
3.6 |
1.0 |
1.2 |
1.5 |
1.6 |
1.5 |
1.7 |
|
|
Unemployment (percent of labor force) |
5.3 |
5.2 |
6.5 |
5.1 |
3.7 |
4.0 |
4.2 |
4.4 |
4.5 |
4.6 |
4.6 |
|
|
Wages (nominal percent change) |
2.1 |
2.3 |
1.6 |
2.0 |
3.2 |
3.2 |
3.1 |
3.0 |
2.9 |
2.8 |
2.8 |
|
|
PRICES |
||||||||||||
|
Terms of trade index (goods, avg) |
83 |
90 |
90 |
110 |
119 |
105 |
99 |
99 |
99 |
99 |
99 |
|
|
% change |
3.2 |
8.3 |
0.2 |
21.8 |
8.1 |
-11.1 |
-5.8 |
-0.4 |
-0.1 |
0.0 |
0.2 |
|
|
Iron ore prices (index) |
101 |
135 |
156 |
228 |
171 |
136 |
136 |
136 |
136 |
136 |
136 |
|
|
Consumer prices (avg) |
1.9 |
1.6 |
0.9 |
2.8 |
6.7 |
5.5 |
3.2 |
2.8 |
2.5 |
2.5 |
2.6 |
|
|
Core consumer prices (avg) |
1.6 |
1.6 |
1.2 |
2.8 |
5.7 |
5.3 |
3.2 |
2.8 |
2.5 |
2.5 |
2.6 |
|
|
GDP deflator (avg) |
2.2 |
3.2 |
0.7 |
5.6 |
7.7 |
-1.2 |
0.4 |
2.9 |
2.4 |
2.5 |
2.5 |
|
|
FINANCIAL |
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|
Reserve Bank of Australia cash rate target (percent, avg) |
1.5 |
1.2 |
0.3 |
0.1 |
1.6 |
3.8 |
3.9 |
3.4 |
3.0 |
3.0 |
3.0 |
|
|
10-year treasury bond yield (percent, avg) |
2.6 |
1.4 |
0.9 |
1.6 |
3.6 |
4.5 |
4.5 |
4.3 |
4.3 |
4.3 |
4.3 |
|
|
Mortgage lending rate (percent, avg) |
5.3 |
4.8 |
4.5 |
4.5 |
6.6 |
7.1 |
7.0 |
6.3 |
6.3 |
6.3 |
6.3 |
|
|
MACRO-FINANCIAL |
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|
Credit to the private sector |
4.7 |
2.5 |
2.1 |
7.4 |
3.3 |
2.0 |
2.1 |
3.9 |
4.8 |
5.0 |
5.6 |
|
|
Interest payments (percent of disposable income) |
8.9 |
7.0 |
5.8 |
5.2 |
9.7 |
11.0 |
9.8 |
8.3 |
8.2 |
8.2 |
8.2 |
|
|
Household savings (percent of disposable income) |
4.6 |
5.9 |
15.5 |
13.1 |
6.5 |
4.1 |
9.1 |
9.9 |
9.5 |
9.1 |
8.8 |
|
|
Household debt (percent of disposable income) 2/ |
186 |
185 |
179 |
186 |
187 |
192 |
176 |
170 |
170 |
170 |
169 |
|
|
Business credit (percent of GDP) |
50.5 |
49.1 |
50.1 |
48.9 |
44.7 |
46.2 |
47.3 |
47.4 |
47.9 |
48.3 |
48.7 |
|
|
GENERAL GOVERNMENT (percent of GDP) 3/ |
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|
Revenue |
35.7 |
35.8 |
34.6 |
35.1 |
36.5 |
35.6 |
36.6 |
36.4 |
36.8 |
37.0 |
37.0 |
|
|
Expenditure |
37.0 |
37.0 |
42.2 |
44.4 |
40.0 |
38.4 |
39.3 |
39.3 |
39.3 |
39.3 |
39.1 |
|
|
Net lending/borrowing |
-1.3 |
-1.2 |
-7.7 |
-9.3 |
-3.5 |
-2.9 |
-2.7 |
-2.9 |
-2.5 |
-2.3 |
-2.1 |
|
|
Commonwealth only |
-0.5 |
-0.1 |
-4.8 |
-6.9 |
-1.5 |
-1.3 |
-1.7 |
-2.1 |
-1.7 |
-1.6 |
-1.6 |
|
|
Operating balance |
0.6 |
0.9 |
-5.5 |
-7.0 |
-1.2 |
-0.6 |
-0.4 |
-0.8 |
-0.3 |
-0.1 |
0.1 |
|
|
Cyclically adjusted primary balance |
0.4 |
0.5 |
-5.0 |
-7.1 |
-2.3 |
-2.0 |
-1.3 |
-1.4 |
-0.9 |
-0.4 |
-0.3 |
|
|
Gross debt |
41.3 |
42.2 |
52.7 |
58.2 |
56.8 |
56.7 |
61.2 |
62.3 |
62.6 |
62.6 |
62.4 |
|
|
Net debt |
23.7 |
24.5 |
32.1 |
34.8 |
31.8 |
34.0 |
37.1 |
38.6 |
39.2 |
39.6 |
39.7 |
|
|
BALANCE OF PAYMENTS |
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|
Current account (percent of GDP) |
-2.2 |
0.3 |
2.3 |
3.1 |
0.9 |
0.4 |
-0.4 |
-0.4 |
-0.5 |
-0.5 |
-0.6 |
|
|
Export volume |
5.1 |
3.2 |
-9.7 |
-2.0 |
4.1 |
7.4 |
3.3 |
2.8 |
2.1 |
2.2 |
2.2 |
|
|
Import volume |
4.3 |
-1.0 |
-12.8 |
5.4 |
14.6 |
6.7 |
3.0 |
2.4 |
2.4 |
2.4 |
2.4 |
|
|
Net international investment position (percent of GDP) |
-54.7 |
-47.7 |
-50.2 |
-35.4 |
-35.0 |
-34.4 |
-34.1 |
-32.8 |
-31.9 |
-30.9 |
-30.1 |
|
|
Gross official reserves (bn A$) |
76 |
84 |
56 |
81 |
… |
… |
… |
… |
… |
… |
… |
|
|
MEMORANDUM ITEMS |
||||||||||||
|
Nominal GDP (bn A$) |
1,894 |
1,992 |
1,971 |
2,190 |
2,444 |
2,454 |
2,507 |
2,635 |
2,759 |
2,892 |
3,031 |
|
|
Percent change |
5.1 |
5.2 |
-1.1 |
11.1 |
11.6 |
0.4 |
2.2 |
5.1 |
4.7 |
4.8 |
4.8 |
|
|
Real GDP per capita (% change) |
1.3 |
0.4 |
-2.8 |
5.0 |
2.9 |
0.5 |
0.5 |
0.8 |
0.9 |
1.1 |
1.1 |
|
|
Population (million) |
25.2 |
25.5 |
25.6 |
25.8 |
26.0 |
26.3 |
26.6 |
27.0 |
27.3 |
27.5 |
27.8 |
|
|
Nominal effective exchange rate |
90.0 |
86.3 |
86.0 |
90.8 |
… |
… |
… |
… |
… |
… |
… |
|
|
Real effective exchange rate |
90.0 |
86.0 |
85.3 |
90.5 |
… |
… |
… |
… |
… |
… |
… |
|
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Sources: Authorities’ data; IMF World Economic Outlook database; and IMF staff estimates and projections. |
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1/ Includes changes in inventories. |
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2/ Reflects the national accounts measure of household debt, including to the financial sector, state and federal governments and foreign overseas banks and governments.It also includes other accounts payable to these sectors and a range of other smaller entities including pension funds. |
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3/ Fiscal year ending June. |
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