{
  "title": "Australia: IMF Staff Concluding Statement of the 2016 Article Mission",
  "publication": "IMF News, November 15, 2016",
  "sourceUrl": "https://www.imf.org/en/news/articles/2016/11/15/ms111516-australia-imf-staff-concluding-statement-of-the-2016-article-iv-mission",
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  "summary": "Australia is transitioning from the mining boom with strong growth and relatively low unemployment, yet showing symptoms of the “new mediocre”:",
  "publishDate": "2016-11-15",
  "sections": [
    {
      "heading": "Context",
      "content": "- Australia is transitioning from the mining boom with strong growth and relatively low unemployment, yet showing symptoms of the “new mediocre”:\n  - Wage and price pressures are weak.\n  - Underemployment has risen.\n  - Non-mining investment is yet to fully recover.\n- Resilience since 2011 reflects:\n  - A flexible exchange rate acting as a shock absorber.\n  - An accommodative monetary policy stance.\n  - Export orientation to the dynamic Asia region.\n  - Flexible labor markets, relatively high population growth, and strong institutions.\n- Structural and macro-financial vulnerabilities:\n  - House prices and household debt ratios have risen further in the low-interest environment post-GFC.\n  - Perennial, sizeable net external liabilities, intermediated in part through the banking sector."
    },
    {
      "heading": "Recent Developments, Outlook and Risks",
      "content": "- Near-term developments:\n  - After a pickup from mid-2015, annual growth has increased to over 3 percent, partly on account of temporary factors.\n  - Both headline and core inflation are now below the RBA’s 2 to 3 percent target range.\n  - Economic slack has started to moderate, but the fall in the unemployment rate has likely overstated labor market improvement.\n  - The underemployment rate has risen; about 80 percent of jobs created over the past year have been part-time jobs.\n- Macro-financial developments:\n  - APRA’s late-2014 prudential measures (including tighter lending standards focusing on debt serviceability) have improved the risk profile of new loans.\n  - Overall housing credit growth and market turnover remain lower than last year, but house price upward pressure has remained strong in some cities.\n  - Household debt remains high, but risks are mitigated by strong growth in deposits in mortgage offset accounts.\n  - Banks’ CET-1 capital ratios have, on a comparable basis, narrowly moved into the upper quartile of international peers, aligning with the Financial System Inquiry recommendation that banks’ capital positions be “unquestionably strong.”\n  - Banks are preparing to meet net stable funding ratio requirements by 2018; the share of stable funding in liabilities has already increased.\n- Outlook:\n  - Baseline: continued gradual recovery; growth expected to moderate somewhat over the next two years.\n  - Disinflation experienced in 2015-16 is expected to start reversing.\n  - House price inflation is expected to realign with broader measures of nominal income.\n  - Accumulation of net external liabilities should slow in the absence of valuation effects.\n- Balance of risks:\n  - Tilted to the downside.\n  - Upside: stronger recovery momentum and terms-of-trade improvements could boost business confidence and investment.\n  - Downside: subdued investment if corporate profits remain under pressure; consumption weakness if wage growth stays low.\n  - External risks: rising populism and nationalism, tighter and more volatile global financial conditions, and a sharp growth slowdown in China could interact with domestic risks (notably a housing correction)."
    },
    {
      "heading": "Policy Discussion",
      "content": "Monetary Policy\n- Recommendation: monetary policy stance should remain accommodative in a still disinflationary global environment.\n- Rationale and guidance:\n  - Low inflation in Australia may persist longer than expected; RBA’s prompt response to early-2016 inflation underscored commitment to inflation targeting.\n  - Prudential measures have mitigated financial-stability concerns from lowering policy rates further.\n  - With a very gradual return of inflation into the target range, lengthening the forecast horizon in monetary policy statements could clarify the RBA’s expectations about the inflation path.\n\n Fiscal Policy\n- Fiscal space and recent performance:\n  - Australia has fiscal space despite missed recent budget targets and rising debt.\n  - Debt-to-GDP metrics suggest fiscal space under both baseline and economic stress scenarios.\n  - IMF staff view: worse-than-planned budget outcomes over past years reflect weaker-than-expected growth rather than policy easing.\n- Government plans and IMF staff advice:\n  - Government appropriately plans to balance the budget over a 5-year horizon while making expenditure composition more growth-friendly.\n  - Expenditure focus: infrastructure and measures supporting longer-term and inclusive growth, including boosting innovation and addressing youth unemployment.\n  - IMF staff recommend a more gradual pace of targeted fiscal consolidation under the baseline and ramping up some growth-friendly spending.\n- Specific budget concerns:\n  - The May 2016 budget targets front-loaded consolidation, especially in FY2017/18 where the adjustment is penciled in at roughly 3/4 of a percentage point of GDP; such pace could be counterproductive now.\n  - Australia has fiscal space to aim for a balanced budget by FY2020/21 with more gradual consolidation.\n  - General government infrastructure spending increased in FY2016/17 mainly due to higher state spending; Commonwealth capital spending is expected to rise by ½ of a percentage point of GDP in the current budget year but is projected to level off and decline thereafter.\n  - IMF staff recommendation: a sustained, multi-year increase in efficient Commonwealth infrastructure spending would be desirable, provided discipline in recurrent spending is maintained.\n- Contingency and long-term framework:\n  - If high-impact downside risks materialize, fiscal policy should support aggregate demand, since monetary policy could be constrained by the lower bound on nominal policy rates.\n  - Contingency plans and a pipeline of infrastructure projects would reduce implementation lags for fiscal stimulus.\n  - IMF staff recommend considering augmenting the current medium-term budget balance anchor with a longer-term debt anchor implemented over a 5- to 10-year horizon to provide certainty while allowing countercyclical support if needed.\n\n Managing Macro-Financial Vulnerabilities\n- Focus: strengthen resilience to housing market and other shocks with macro-financial implications.\n- Recommendations:\n  - APRA should be ready to intensify targeted prudential measures if investor and other risky lending or house price growth re-accelerate, calibrated to avoid triggering a sharp correction.\n  - APRA should continue to encourage banks to anchor capital positions in “unquestionably strong” territory given a highly concentrated banking sector with similar business models.\n  - Treasury should continue preparing legislation to implement Financial System Inquiry recommendations, including on the crisis management toolkit and bank resolution.\n  - APRA should continue implementing prudential steps to strengthen banks’ loss absorbing and recapitalization capacity and introduce leverage ratios, in line with the international agenda.\n  - Tax reform could enhance macro-financial resilience by removing household incentives for leveraged real estate investment that likely amplify housing cycles.\n\n Keeping Up Productivity Growth\n- Challenges:\n  - Overall labor productivity growth remained broadly stable over the 2000s, but labor productivity growth has been weak in some services sectors with growing employment shares; multifactor productivity growth has been weak more generally.\n- Government reform agenda:\n  - Focuses on fostering innovation and strengthening competition.\n  - National Innovation and Science Agenda allocates $1.1 billion over four years to boost innovation and entrepreneurship in the high tech sector; IMF staff encourage continuation and possible expansion if effective.\n  - Measures recommended by the Harper Review would strengthen services sector competition and productivity; implementation requires extensive Commonwealth–State/Territory collaboration.\n  - Continued efforts toward further trade liberalization in regional and multilateral fora are welcomed; expanding access to service export markets could strengthen services sector productivity.\n  - A strong social safety net and active labor market policies would mitigate adjustment costs for affected workers.\n\nIMF Communications Department — Mission Concluding Statement, November 15, 2016\n\n---\n\n\n References\n\n- Australia and the IMF\n- Mission Concluding Statements\n- PRESS CENTER\n- https://www.imf.org/en/home\n\nSource: https://www.imf.org/en/news/articles/2016/11/15/ms111516-australia-imf-staff-concluding-statement-of-the-2016-article-iv-mission"
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    "Published: November 15, 2016",
    "Australia is transitioning from the mining boom with strong growth and relatively low unemployment, yet showing symptoms of the “new mediocre”:",
    "Resilience since 2011 reflects:",
    "Structural and macro-financial vulnerabilities:",
    "Near-term developments:",
    "Macro-financial developments:",
    "Outlook:",
    "Balance of risks:",
    "Recommendation: monetary policy stance should remain accommodative in a still disinflationary global environment.",
    "Rationale and guidance:",
    "Fiscal space and recent performance:",
    "Government plans and IMF staff advice:",
    "Specific budget concerns:",
    "Contingency and long-term framework:",
    "Focus: strengthen resilience to housing market and other shocks with macro-financial implications.",
    "Recommendations:",
    "Challenges:",
    "Government reform agenda:",
    "[Australia and the IMF](http://www.imf.org/external/country/AUS/index.htm)",
    "[Mission Concluding Statements](https://www.imf.org/en/news/searchnews)",
    "[PRESS CENTER](http://presscenter.imf.org/)",
    "[https://www.imf.org/en/home](https://www.imf.org/en/home)"
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