IMF Executive Board Concludes 2024 Article IV Consultation with Australia
IMF News, December 23, 2024
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- Published: December 23, 2024
Summary of Recent Developments
- Executive Board concluded the Article IV consultation with Australia on December 2, 2024, and endorsed the staff appraisal without a meeting on a lapse-of-time basis.
- Australia’s economic growth slowed to 1.0 percent (y/y) in Q2 2024 from 1.9 percent a year prior.
- Private consumption growth dropped to 0.5 percent (y/y) in Q2 2024.
- Growth in private business investment eased to 1.6 percent (y/y).
- Public demand and infrastructure projects bolstered economic activity.
- Unemployment was 4.1 percent in September 2024, with labor market conditions softening gradually while job creation remained strong.
- The current account returned to deficit in early 2024 as commodity prices normalized.
- Inflation dropped to 2.8 percent (y/y) in Q3 2024, with underlying pressures persisting, especially in non-tradable sectors.
- National housing prices have surpassed pandemic peaks and rents have risen amid historically low vacancy rates.
- The government achieved a budget surplus in FY2023/24, for the second year in a row, while implementing cost-of-living measures.
Near-term Outlook and Projections
- Growth projection: 1.2 percent in 2024, rising to 2.1 percent in 2025.
- Labor market projection: Unemployment is projected to rise gradually to 4.5 percent.
- Inflation projection: Trimmed mean inflation expected to return to the RBA’s target range by end-2025 and the mid-point in 2026; headline inflation to be more volatile due to temporary energy rebates.
- Drivers of projected pick-up in 2025:
- Real income growth from rising wages and tax cuts may boost private consumption.
- Public demand will remain strong.
- Private demand to benefit from monetary easing and a pick-up in dwelling construction.
- Growth is expected to remain below potential until 2026.
- Balance of risks: Tilted to the downside with significant uncertainty around the macroeconomic outlook.
Downside and External Risks
- Domestic downside risks:
- Persistent labor market tightness and stronger-than-expected fiscal impulses could stall disinflation.
- Lower spare capacity than currently assessed could lead to higher-for-even-longer interest rates, adversely impacting consumption and investment.
- Alternative domestic scenario:
- Weaker-than-expected growth or a faster-than-projected increase in unemployment may prompt the Reserve Bank to lower interest rates sooner.
- External risks:
- Weakness in major trading partners.
- Geoeconomic fragmentation affecting global trade.
- Rising shipping costs and volatile energy and food prices amid escalating geopolitical tensions.
- These external shocks could complicate the disinflation process.
Executive Board Assessment — Main Messages
- Australia remains on a narrow path to a soft landing, but risks are tilted to the downside.
- Growth slowed in the first half of the year; household consumption is weak as real incomes remained soft.
- Despite rising unemployment, the labor market remains resilient.
- Growth is expected to pick up over the following quarters, supported by a gradual recovery in private demand and robust public demand.
- Downside risks include persistent weakness in private demand or a further slowdown in key trading partners.
Policy Guidance — Near Term
- Monetary policy:
- Current restrictive monetary stance is appropriate to manage the final descent of inflation to target.
- Monetary policy should be prepared to tighten further if upside inflation risks materialize.
- Fiscal policy:
- Fiscal policy should avoid an expansionary stance and complement monetary policy’s disinflation objective.
- Expenditure rationalization at all levels of government could help reduce aggregate demand and support a quicker return of inflation to its target.
- Reprofiling public infrastructure investments and improving targeting of transfer programs can mitigate excess demand while supporting the most vulnerable.
- Institutional:
- Reforms aimed at further bolstering the RBA's independence and supporting coordination of monetary and fiscal policies are important.
- Contingent macro policy mix:
- If disinflation stalls, tighter monetary and fiscal policies may be necessary to ensure monetary and fiscal authorities complement each other and avoid overburdening any single policy instrument.
Policy Guidance — Medium Term and Structural Reforms
- Fiscal framework and public finances:
- Broader tax and expenditure policy reforms should reduce structural deficits, promote economic efficiency, and safeguard long-term fiscal sustainability.
- Tax reforms should focus on efficiency and fairness, reducing dependence on direct taxes and high capital costs, and phasing out tax breaks like capital gains tax discounts.
- Expenditure reforms should enhance efficiency and contain structural spending growth across all levels of government given demographic headwinds and climate change.
- Consider further strengthening fiscal policy frameworks with a clearer medium-term anchor to guide buffer rebuilding.
- Financial sector and housing:
- Macroprudential policies should remain stringent to protect household balance sheets amid rising housing prices.
- Authorities encouraged to proactively adapt macroprudential tools to preempt excessive buildup in household indebtedness, including when monetary easing is appropriate.
- Comprehensive policy package to address housing affordability: increase the construction workforce, relax zoning regulations, advance initiatives to boost new housing supply, and reevaluate property taxes and stamp duty.
- Productivity and innovation:
- Prioritize efforts to rejuvenate productivity growth through competition policy, reforms in capital and labor markets, and opportunities presented by AI technologies.
- Enhance innovation by promoting R&D, supporting intellectual property rights, and ensuring policy certainty.
- Improve competition landscape, assess non-compete clauses, and reform merger rules.
- Promote public awareness, access to training, and upskilling for workers affected by AI to maximize productivity benefits while mitigating job displacement risks.
- Climate and green policy:
- Green industrial policy initiatives should be confined to narrow objectives where market failures exist and be consistent with international obligations.
- Transition to a greener economy requires mitigation, adaptation, and transition policies.
- Achieving emission reduction goals depends on addressing construction bottlenecks and community engagement; potential solutions include an economy-wide carbon price or targeted sectoral policies.
- Governance:
- Australia’s voluntary participation in reviewing transnational corruption is a positive signal for global governance improvements.
Key Statistics and Table Highlights (selected exact figures)
- Q2 2024 real GDP growth: 1.0 percent (y/y).
- Q2 2023 real GDP growth: 1.9 percent (y/y) a year prior.
- Private consumption growth (Q2 2024): 0.5 percent (y/y).
- Private business investment growth (Q2 2024): 1.6 percent (y/y).
- Unemployment: 4.1 percent in September 2024.
- Inflation: 2.8 percent (y/y) in Q3 2024.
- Growth projections: 1.2 percent in 2024; 2.1 percent in 2025.
- Projected unemployment: 4.5 percent (gradual rise).
- Trimmed mean inflation: expected to return to RBA’s target range by end-2025 and the mid-point in 2026.
- Selected entries from Table 1 (annual percent change or exact values as reported):
- Real GDP: 2019: 1.8; 2020: -2.1; 2021: 5.5; 2022: 3.9; 2023: 2.0; 2024: 1.2; 2025: 2.1; 2026: 2.3; 2027: 2.2.
- Private consumption: 2019: 0.9; 2020: -6.1; 2021: 5.1; 2022: 7.2; 2023: 1.0; 2024: 2.5; 2025: 2.7.
- Unemployment (percent of labor force): 2019: 5.2; 2020: 6.5; 2021: 3.7; 2022: 4.6.
- Terms of trade index (goods, avg): 2019: 77; 2020: 94; 2021: 103; 2022: 96; 2023: 90; 2024: 87; 2025: 86.
- Consumer prices (avg): 2022: 6.6.
- Core consumer prices (avg): 2023: 5.3; 2024: 3.6.
- Investment (percent of GDP) 1/: 2019: 22.5; 2020: 22.3; 2021: 23.3; 2022: 23.7; 2023: 24.0; 2024: 24.2; 2025: 24.1.
- Household debt (percent of disposable income) 2/: 2019: 186; 2020: 181; 2021: 187; 2022: 188; 2023: 185; 2024: 182; 2025: 178; 2026: 177; 2027: 176.
- Gross debt (general government, percent of GDP): 2019: 42.1; 2020: 52.5; 2021: 58.0; 2022: 52.9; 2023: 49.2; 2024: 49.8; 2025: 49.4; 2026: 48.4; 2027: 47.5; 2028: 46.5.
- Nominal GDP (bn A$): 2019: 1,996; 2020: 1,977; 2021: 2,206; 2022: 2,481; 2023: 2,618; 2024: 2,716; 2025: 2,837; 2026: 2,978; 2027: 3,114; 2028: 3,257; 2029: 3,409.
- Sources cited in the table: Authorities' data; IMF World Economic Outlook database; and IMF staff estimates and projections.
IMF Communications Department — Press Release No. 24/482 (December 23, 2024).
