Australia: Staff Concluding Statement of the 2024 Article IV Mission
IMF News, October 2, 2024
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- Published: October 2, 2024
I. Context and recent developments — cyclical slowdown amid resilient fundamentals
- Recent decades of strong growth attributed to "effective policies, strong institutions, flexible prices, strong regional trade links, and robust population growth."
- Post-pandemic macro policy: balanced measures to manage demand and bring inflation back to target while preserving labor market gains.
- Growth decelerated to 1.0 percent (y/y) in 2024Q2, down from 1.9 percent (y/y) a year ago.
- Per capita private consumption: down 1.9 percent (y/y) in 2024Q2 due to high inflation, elevated interest rates, and taxes growing faster than incomes prior to recent income tax cuts.
- Private business investment: growing at 1.6 percent (y/y).
- Public demand and large state infrastructure projects supporting activity.
- Labor market: unemployment at 4.2 percent in August 2024; vacancies-to-unemployment ratio remains above pre-pandemic levels.
- Current account: fell into deficit in early 2024, driven primarily by normalization of commodity prices.
- Inflation developments:
- Headline inflation fell to 3.8 percent (y/y) in 2024Q2 from a peak of 7.8 percent (y/y) in late 2022.
- Monthly CPI indicator declined to below 3 percent in August (temporary electricity subsidies cited).
- Underlying price pressures remain elevated in non-tradable sectors: rents, new dwellings, insurance.
- Fiscal: second consecutive Commonwealth Government budget surplus in FY2023/24 achieved by saving revenue windfalls and reprioritizing expenditure while implementing cost-of-living relief.
- Housing: national house prices have surpassed pandemic-era peaks; rents rising significantly; acute demand-supply imbalances beginning to ease but supply shortfall persists.
II. Outlook and risks — gradual recovery with downside tilt
- Growth projections:
- 2024: 1.2 percent
- 2025: 2.1 percent
- Convergence to potential: 2.3 percent by 2026
- Labor market outlook: modest rise in unemployment to about 4.5 percent.
- Inflation outlook: trimmed mean inflation expected to sustainably return to the RBA’s target range at end-2025; underlying price pressures easing only slowly.
- Demand drivers: real wage growth to boost private consumption; public demand expected to remain solid; private demand to benefit from gradual monetary easing and rebound in dwelling construction starting 2025 after bottleneck resolution.
- Key upside inflation risks: slower rebalancing in labor market demand and supply; larger-than-expected fiscal impulses; demand impact of recent house price increases; higher tradable prices from rising geoeconomic fragmentation.
- External risks:
- Weakness in major trading partners.
- Geoeconomic fragmentation potentially reconfiguring global trade; implications for commodity exports.
- Rising shipping costs and volatile energy and food costs from geopolitical tensions.
- Domestic risks:
- Disinflation could stall because of persistent services inflation, stronger fiscal impulse, or global supply disruptions, raising prospects of "higher-for-even longer" interest rates.
- Alternatively, growth could be weaker or unemployment could rise faster than projected, possibly prompting earlier rate cuts.
III. Near-term policies — bring down inflation while nurturing growth and preserving financial stability
- Monetary policy:
- Reserve Bank of Australia’s continued restrictive stance is judged appropriate to address persistent inflation.
- If disinflation stalls, monetary policy may need further tightening.
- RBA encouraged to strengthen communications to guide public and market understanding of data-dependent decision-making.
- Fiscal policy:
- Should support disinflation while supply capacity constraints persist.
- If disinflation stalls, a tighter fiscal stance is warranted; better targeting of transfers to protect vulnerable households is recommended.
- FY2024/25 Commonwealth budget: mission estimates project a positive fiscal impulse; preannounced personal income tax (PIT) cut and new expenditure items expected to move budget toward deficit.
- State and Territory budgets described as "more expansionary than expected" with cost-of-living support and infrastructure spending.
- Recommendation: expenditure rationalization at all government levels if disinflation stalls; prioritize infrastructure to avoid aggravating construction capacity constraints and focus on productivity and the green transition.
- Macroprudential and financial stability:
- Maintain stringent macroprudential stance to mitigate household balance sheet vulnerabilities amid rising house prices.
- Banks assessed as strong: high capital, solid liquidity, healthy profits; resilience in APRA stress tests.
- Vulnerabilities: low-income households, small-medium enterprises, potential hidden leverage, exposures in Non-Bank Financial Institutions (data gaps), and CRE sector risks.
- Mission welcomes APRA’s planned first system stress test and monitoring of lending standards.
- Recommendation: consider preemptively expanding toolkit to include borrower-based measures such as Debt-to-Income and Loan-to-Value Ratio.
- Housing affordability — need for a holistic policy package:
- Supply shortfall drivers: restrictive planning and zoning, high land costs, infrastructure deficits, residential dwelling investment around decade lows, high interest rates, elevated building costs, labor shortages, backlog in development.
- Recommended measures: increase construction worker supply; relax zoning and planning restrictions; support built-to-rent sector; expand public and affordable housing; reevaluate property taxes (including tax concessions to property investors) and stamp duty to promote efficient land use.
- Capital flow management measures that discriminate between residents and nonresidents are inconsistent with the Fund’s Institutional View and should be replaced by non-discriminatory measures.
IV. Medium-term reform priorities — boost resilience and productivity
- Institutional and governance recommendations:
- Establish a new Monetary Policy Board and strengthen governance and decision-making to bolster central bank operational autonomy and monetary-fiscal synergies.
- Tax and fiscal policy:
- Tax reforms to improve efficiency and fairness; reduce reliance on direct taxes and high capital costs.
- Phase out tax breaks including capital gains tax discount and superannuation concessions to generate a more equitable and efficient tax system.
- Anticipate structural upward pressures on government spending from environmental and demographic changes; pursue expenditure reforms to enhance efficiency and sustainability.
- Consider bolstering fiscal policy framework with clearer anchors.
- Productivity and competition:
- Prioritize reforms across capital and labor markets guided by the five pillar Productivity Agenda: innovation, level playing field, human capital.
- Enhance innovation: build intangible capital, promote R&D, support rapid technology adoption, protect intellectual property rights, ensure policy certainty.
- Competition improvements: data-based assessment of worker restraints (non-compete clauses); reform merger rules toward a risk-based system using notification thresholds.
- Labor market efficiency: expand access to quality early childhood education; enhance skills development aligned with market needs.
- AI and labor market adaptation:
- Many occupations highly exposed to AI; recommend public awareness programs and access to training and upskilling.
- Emphasize proactive labor market policies, ongoing assessment, policy flexibility, and multilateral collaboration for safe and responsible AI use.
- Climate transition:
- Balanced mix of mitigation, adaptation, and transition policies needed for an orderly low-carbon transition.
- Address construction bottlenecks and community engagement; consider economy-wide carbon price or targeted sectoral policies.
- Transition impacts: jobs, exports, revenues—noting Australia’s role as a leading coal exporter.
- Opportunities: green metals, green hydrogen, critical minerals mining and processing.
- Recommendation: "Future Made in Australia" program should be carefully designed and narrowly targeted to market failures, adhere to market-based principles, minimize trade and investment distortions, and crowd in private investment.
- Governance and anticorruption:
- Commendation for Australia’s voluntary participation in review of transnational aspects of corruption; noted as a positive signal for addressing transnational corruption and improving governance.
Staff Concluding Statement — Australia: 2024 Article IV mission; October 2, 2024.