Australia: Staff Concluding Statement of the 2023 Article IV Mission
IMF News, October 31, 2023
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- Published: October 31, 2023
Economic outlook and growth
- Growth is forecast to slow to 1¼ percent in 2024 in response to tighter macroeconomic policies and financial conditions.
- GDP growth slowed to 2.1 percent (y/y) in 2023Q2, from 3.7 percent (y/y) in 2022.
- Growth is expected to slow to around 1.8 percent y/y in 2023 and 1.2 percent y/y in 2024.
- Output is estimated at around 1 percent above potential; the output gap is expected to close in 2024.
- Elevated net migration, resilient private investment, and strong public investment in transport, health, education, and national defense were main drivers of recent growth.
- Net exports contributed to growth on the back of robust sales of iron ore and coal, and a strong rebound in tourism and education.
Labor market and households
- Unemployment remained low at 3.6 percent in September.
- Some emerging signs of weakening in hours worked.
- Real household disposable income declined due to higher inflation and higher mortgage interest rates, contributing to slower consumer demand in real terms.
- Mortgage payments as a share of disposable income have doubled due to higher interest rates.
- Pandemic-related savings and household consumption behavior introduce additional uncertainty.
Inflation and price dynamics
- Headline inflation declined to 5.4 percent in 2023Q3 (from a peak 7.8 percent in 2022Q4).
- Average inflation projected at 5.8 percent in 2023 and 4.0 percent in 2024.
- Reserve Bank of Australia’s (RBA) target range is 2-3 percent; inflation remains well above this target.
- Services inflation remains sticky and broad-based, driven by:
- strong demand;
- input cost pressures from labor costs (reflecting historically tight labor markets and weak productivity outcomes);
- non-labor costs such as rent and electricity.
- Tight conditions in the rental housing market have led to a significant acceleration in rent inflation.
- Higher insurance premia, including from increasing weather-related claims, are adding to pressures.
- Easing of global supply chain pressures and slowdown in domestic demand have helped reduce goods inflation.
Monetary and fiscal policy stance
- Monetary policy has tightened with cumulative rate hikes of 400 basis points since early 2022.
- The fiscal deficit has contracted faster than in other advanced economies.
- Commonwealth’s fiscal strategy has returned the majority of improvements to revenue towards improving the fiscal position.
- Staff recommend further monetary policy tightening to ensure that inflation comes back to the target range by 2025 and minimize the risk of de-anchoring inflation expectations.
- Continued coordination between monetary and fiscal policy is key to achieving a soft landing and securing more equitable burden sharing.
- Recommendation: Commonwealth Government and state and territory governments should implement public investment projects at a more measured and coordinated pace, given supply constraints, to alleviate inflationary pressures.
Fiscal framework and medium-term public finances
- Over the medium term, governments need to reduce structural deficits and promote economic efficiency.
- All levels of government need to improve expenditure outcomes and contain structural spending growth in health, aged care, and the NDIS.
- The new national wellbeing framework can help focus on achieving better outcomes by fostering cooperation across government levels.
- Recommendation: Greater expenditure decentralization to enable comprehensive tax reforms, including rebalancing from high direct taxes to underutilized indirect taxes.
- Transitional revenue losses from tax reform could be bridged, for example, with higher GST.
- Recommendation: Re-calibrating the GST equalization formula can address differential pandemic impacts on subnational fiscal sustainability.
- At state and territory level: implementing recurring property taxes in lieu of stamp duties on housing transactions would promote housing affordability, more efficient use of the housing stock, labor mobility, and more stable tax bases over the medium term; transitional revenue losses, if substantial, could be bridged.
Financial stability and macroprudential policy
- Financial stability risks appear contained despite heightened global uncertainty.
- Business insolvencies have increased and are now at their pre-pandemic level; banks’ non-performing business loans remain very low.
- Risks from mortgage lending are limited overall, but pockets of vulnerability exist among a relatively small segment of lower income households with high debt and low equity.
- Conditions in office and retail commercial real estate are difficult, but banks’ direct exposures are small.
- Australian banks are profitable and capital levels are at a historic high following the commencement of the enhanced capital framework in January 2023.
- Recommendation: Consider additional borrower-based tools, such as loan-to-value and debt-to-income limits, to boost the macroprudential toolkit and contain build-up of risks.
Housing supply and affordability
- Housing prices picked up after a correction in 2022; affordability challenges persist.
- Rents have increased at a very fast pace; strong growth in immigration following the post-COVID re-opening has added to pressures given housing shortages.
- The authorities have planned a suite of housing policies which, if implemented, would boost supply.
- Recommendation: Supportive planning and land-use policies are critical to increasing housing stock.
Productivity, labor market reforms, and skills
- Australia has experienced a sustained decline in productivity growth in recent decades, contributing to higher unit labor costs and reduced competitiveness.
- Recommendations to boost productivity and innovation include:
- continued investment in digital infrastructure;
- a more open FDI regime;
- better labor market integration of skilled immigrants to speed technology adoption;
- reforms to foster competition and innovation.
- The authorities’ Competition Policy Review, review of skilled migration settings, and development of a Migration Strategy are welcomed.
- Education and vocational training:
- Authorities increased childcare subsidy rates to facilitate more full-time work, particularly for women.
- Immigrants have, on average, higher education levels than the Australian-born population but often face placement challenges.
- Authorities’ efforts to boost spending on vocational training will help reduce skills shortages and could lift productivity.
- Efforts are needed to address declining education outcomes as indicated by test scores.
- The Employment White Paper’s focus on these issues is welcomed.
Climate change and green transition
- An economy-wide carbon price would be the most effective way to achieve net zero; as a second-best, strong sectoral policies with price signals where possible can deliver needed abatement.
- Australia’s new law to reform the Safeguard Mechanism is an important milestone.
- Recommendation: Consider gradually expanding the coverage of the mechanism to a greater share of the economy.
- Ensuring the integrity of carbon offsets is key for the functioning of the system.
- Staff welcome the authorities’ objective of increasing the share of renewable energy to 82 percent by 2030 and their announcement to impose fuel efficiency standards.
- Comment: Tax incentives for EV purchases are potentially regressive and seem less effective, given supply bottlenecks.
- Recommendation: Additional policies and investment are needed to achieve mitigation goals; price signals such as feebates in energy and transport sectors could elicit broad behavioral responses without impacting average prices.
Risks to the outlook
- Risks to growth are broadly balanced; inflation may continue to exceed expectations.
- Near-term growth downside risks include:
- a more protracted downturn in China;
- deepening geo-economic fragmentation;
- escalating conflicts.
- Upside growth risks include:
- higher migration;
- faster execution of public investment;
- an acceleration of housing price increases that could boost consumer sentiment and household consumption through wealth effects (but would add to inflation pressures).
- Other risks:
- higher-for-longer inflation could de-anchor inflation expectations and generate further wage pressures;
- spikes in energy (particularly for petrol) and food prices;
- climate-related natural disasters;
- cybersecurity risks;
- household consumption uncertainty related to the use of pandemic-related savings.
Governance and integrity
- The authorities have made significant efforts to improve the framework for detecting foreign bribery; further enforcement is needed.
- Participation in a voluntary review of policies to curb transnational corruption is welcomed.
Mission Concluding Statement — October 31, 2023. International Monetary Fund.