IMF Executive Board Concludes 2023 Article IV Consultation with Australia
IMF News, January 19, 2024
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- Published: January 19, 2024
Macroeconomic assessment and near-term outlook
- The Executive Board concluded the Article IV consultation with Australia.
- Australia’s post-pandemic recovery remained strong but growth is weakening due to tighter macroeconomic policies and financial conditions.
- Inflation has peaked but “remains persistently high.”
- Labor market indicators show signs of easing and the positive output gap is narrowing.
- Increased cost of living is weighing on household consumption; households with mortgages are bearing the brunt of higher interest rates amid lower real wages and depleting savings.
- The economy is resilient in the near term but faces a sustained slowdown in productivity growth.
- Risks to the growth outlook are balanced; upside risks include robust immigration. Financial stability risks remain contained despite pockets of vulnerability and higher risks from global financial conditions.
Staff projections and key numerical outlook
- Growth projections:
- Growth is expected to slow to around 1.8 percent y/y in 2023 and 1.4 percent y/y in 2024.
- Executive Board noted potential need for further monetary tightening to achieve targeted inflation range by 2025 and recommended a data‑dependent approach.
- Inflation and labor market:
- Under staff’s baseline projections, inflation would decline gradually and return to the RBA’s target range in 2026.
- Persistence in non-tradeable prices driven by demand pressures and a positive output gap amid tight labor markets would keep inflation elevated in the near term.
- Recent strong net migration inflows are expected to further alleviate labor market tightness but add to demand, especially in the rental market.
Executive Board Assessment — findings and recommendations
- Directors commended Australia’s sound macroeconomic policies that supported a strong recovery and resilience.
- Fiscal policy:
- Directors welcomed progress on fiscal consolidation and commitment to debt sustainability.
- They underscored the need for a tighter fiscal stance to support disinflation.
- Directors saw merit in a comprehensive tax reform and highlighted rebalancing the tax system from direct to indirect taxes, while addressing regressive impacts, would promote greater efficiency.
- They recognized measures taken to contain spending growth and underscored the importance of well‑targeted support for vulnerable households.
- Implementing public investment projects at a more measured pace would also support disinflation efforts.
- Monetary and financial stability:
- Directors highlighted potential need for further monetary tightening; recommended a data‑dependent approach.
- They welcomed measures to bolster financial stability and progress on implementing FSAP recommendations.
- Encouraged continued strengthening of macroprudential decision‑making and crisis management and resolution frameworks.
- Noting renewed increases in house prices, Directors recommended adoption of additional borrower‑based prudential tools.
- Supported initiatives to boost housing supply and emphasized supportive planning and land‑use policies.
- Structural reforms and inclusion:
- Commended measures to tackle skill shortages and improve labor market outcomes, particularly for women.
- Stressed the need for further reforms to reignite productivity growth and foster inclusion.
- Climate and emissions:
- Welcomed efforts to meet climate mitigation targets and highlighted the role of the Safeguards Mechanism in reducing emissions.
- Recognized meeting the 2030 climate target will be challenging and encouraged additional efforts to achieve net zero emission target by 2050.
- Welcomed focus on developing sectoral decarbonization plans and noted alternative sectoral policies can help reduce emissions.
Key quantitative indicators (selected series from Table 1)
- Real GDP (annual percent change, 2018–2027 as listed): 2.8, 1.9, -1.8, 5.2, 3.7, 1.8, 1.4, 2.0, 2.2, 2.3
- Domestic demand (annual percent change, partial series): 2.7, 1.2, -2.2, 6.0, 4.7, 1.7
- Private consumption (annual percent change, partial series): 2.4, 1.1, -5.8, 5.0, 6.5, 0.8, 2.9
- Investment (percent of GDP, 2018–2028): 24.2, 22.6, 22.3, 23.1, 23.3, 23.8, 24.8, 25.0, 25.2, 25.3, 25.4
- Private investment (percent of GDP, partial series): 18.9, 17.6, 17.3, 18.0, 17.7, 18.3, 19.2, 19.4, 19.6, 19.8
- Savings (gross, percent of GDP, partial series): 22.0, 24.5, 26.2, 24.7, 24.4, 24.3, 24.6
- Employment and labor market (selected): Employment growth entries include 3.1, 1.6; Unemployment (percent of labor force) entries include 5.3, 4.2, 4.4, 4.6
- Wages (nominal percent change): 3.6
- Consumer prices (avg): 6.6
- Core consumer prices (avg): 5.5
- GDP deflator (avg): 7.9
- Terms of trade index (goods, avg): 83, 90, 109, 120, 108, 96, 95 (% change series: 8.4, 0.3, 21.4, 9.6, -9.9, -11.3, -0.1)
- Iron ore prices (index): 101, 135, 156, 228, 174, 161, 137, 124, 114, 105
- Reserve Bank of Australia cash rate target (percent, avg): (table header present)
- 10-year treasury bond yield (percent, avg): 4.5
- Mortgage lending rate (percent, avg): 4.8, 7.3, 8.3, 8.1, 7.6, 7.4
- Credit to the private sector: 7.8
- House prices (% change): -5.1, 23.7, 7.1
- House price-to-income, capital cities (ratio): 4.9
- Interest payments (percent of disposable income): 10.8, 13.3, 12.6, 11.9, 11.0, 10.4
- Household savings (percent of disposable income): 15.5, 13.1, -0.3, 3.4
- Household debt (percent of disposable income): 186, 185, 179, 187, 193, 190, 183, 182
- Business credit (percent of GDP, 2018–2028 as listed): 50.4, 49.1, 50.1, 48.9, 49.3, 52.4, 54.1, 54.5, 55.1, 55.6, 56.1
- General government (percent of GDP, selected series):
- Revenue: 35.6, 35.7, 34.5, 35.0, 36.0, 36.4, 37.3, 35.5, 35.1
- Expenditure: 36.8, 36.9, 42.1, 44.3, 40.0, 37.2, 39.2, 38.0, 36.6, 36.3
- Net lending/borrowing: -1.3, -1.2, -7.7, -9.3, -2.3, -1.5
- Gross debt: 41.3, 42.2, 52.7, 58.3, 53.5, 49.5, 54.4, 55.3, 56.0, 55.2
- Net debt: 32.1, 33.7, 27.1, 31.3, 33.4, 34.3, 33.9
- Balance of payments and external sector (selected):
- Net international investment position (percent of GDP): -57.0, -50.1, -53.0, -38.3, -38.2, -32.5, -32.3, -31.4, -30.5, -29.7, -29.0
- Gross official reserves (bn A$): 76, 84, 56, 81, 85, …
- Memorandum items:
- Nominal GDP (bn A$): 1,894, 1,992, 1,971, 2,189, 2,450, 2,536, 2,591, 2,721, 2,853, 2,995, 3,143
- Population (million): 25.1, 25.5, 25.6, 25.8, 26.3, 26.6, 26.9, 27.3, 27.6, 27.9, 28.3
- Nominal effective exchange rate: 90.0, 86.3, 86.0, 90.8, 90.3
- Real effective exchange rate: 85.3, 90.5, 90.7
Policy implications and recommended actions (summarized)
- Monetary policy: Maintain data‑dependent approach; be prepared for further tightening if required to bring inflation to target by 2025.
- Fiscal policy: Pursue tighter fiscal stance to support disinflation; continue fiscal consolidation and measured pace of public investment; consider comprehensive tax reform and rebalancing from direct to indirect taxes while addressing regressivity.
- Financial stability: Strengthen macroprudential decision‑making and crisis management and resolution frameworks; consider additional borrower‑based prudential tools in light of renewed house price increases.
- Housing and supply: Boost housing supply with supportive planning and land‑use policies to improve affordability.
- Structural reforms: Implement measures to address skill shortages, improve labor market outcomes (especially for women), reignite productivity growth, and foster inclusion.
- Climate policy: Consider additional efforts to achieve the 2030 and net zero by 2050 targets; develop sectoral decarbonization plans and leverage the Safeguards Mechanism.
IMF Executive Board Concludes 2023 Article IV Consultation with Australia — Press Release No. 24/13 (January 18, 2024).
