IMF Executive Board Concludes 2022 Article IV Consultation with Australia
IMF News, February 1, 2023
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- Published: February 1, 2023
Economic outlook and inflation
- Rapid post-pandemic economic recovery and favorable terms of trade have placed Australia in a stronger cyclical position than many other advanced economies.
- Growth projections:
- Real GDP: 3.6 percent in 2022; 1.6 percent in 2023; 1.7 percent in 2024; 2.1 percent in 2025; 2.2 percent in 2026; 2.3 percent in 2027; 2.2 percent in 2028.
- Domestic demand: 4.9 percent in 2022; 2.0 percent in 2023.
- Private consumption: 6.8 percent in 2022; 2.5 percent in 2023.
- Investment (percent of GDP): 23.3 in 2022; 23.6 in 2023; 24.0 in 2024.
- Inflation and labor market:
- Inflation has risen to significantly above the RBA’s target, driven by high commodity prices and strong domestic demand.
- Inflation is projected to decelerate gradually toward the 2-3 percent inflation target by end-2024.
- Labor markets confront significant tightening; wage growth thus far has remained modest relative to many other advanced economies.
- Risks:
- Downside risks dominate the outlook, including uncertainty about global growth, commodity prices, wages, housing prices, and the effect of tighter monetary conditions.
- Specific downside triggers include a stronger global downturn, persistently high inflation expectations, and rising geo-economic fragmentation.
Executive Board assessment and near-term policy guidance
- Overall assessment: Australia’s economy is expected to come to a soft landing in 2023 from a strong cyclical position, but risks are skewed significantly to the downside.
- Monetary policy:
- Restrictive macroeconomic policies are needed in the near term to mitigate strong domestic demand and address inflation.
- Monetary policy needs to continue tightening in the short term as envisaged; the pace of rate increases should continue to be data-dependent given uncertainty regarding monetary transmission.
- Transparency in communication, underpinned by assessment of the balance of risks, should continue to convey policy intentions to keep inflation expectations well anchored.
- Fiscal policy:
- Near-term fiscal restraint should support monetary policy in addressing demand.
- Budgetary revenue overperformance should be saved.
- Implementation of spending programs should remain judicious; any additional cost-of-living support amid high inflation should be temporary and well targeted to the vulnerable.
- Implementing comprehensive tax reforms and improving efficiency in expenditure programs will pave the road for a credible consolidation path over the medium-term.
- The Commonwealth Government should direct windfall revenue gains to budget repair to create additional fiscal buffers for future shocks.
Fiscal position and public finances (selected indicators)
- General government (percent of GDP):
- Revenue: 36.5 in 2022; 35.6 in 2023; 36.6 in 2024; 36.4 in 2025; 36.8 in 2026; 37.0 in 2027; 36.5 in 2028.
- Expenditure: 39.3 in 2022; 39.1 in 2023.
- Net lending/borrowing: -2.9 in 2022; -2.3 in 2023; -2.1 in 2024.
- Gross debt: 56.7 in 2022; 61.2 in 2023; 62.3 in 2024; 62.6 in 2025; 62.4 in 2026.
- Net debt: 31.8 in 2022; 34.0 in 2023; 37.1 in 2024; 38.6 in 2025; 39.2 in 2026; 39.6 in 2027; 39.7 in 2028.
- Memorandum:
- Nominal GDP (bn A$): 2,444 in 2022; 2,454 in 2023; 2,507 in 2024; 2,635 in 2025; 2,759 in 2026; 2,892 in 2027; 3,031 in 2028.
- Population (million): 26.0 in 2022; 26.6 in 2023; 27.0 in 2024; 27.3 in 2025; 27.5 in 2026; 27.8 in 2027.
Financial stability, housing, and macro‑financial vulnerabilities
- Housing market and financial system:
- With tighter financial conditions, housing prices have started declining from their peak and are expected to continue declining significantly from their pandemic-era highs.
- Financial stability risks from the housing price correction appear to remain contained given prudent lending standards and significant buffers among banks and households.
- Pockets of vulnerability may build up, for example among households that purchased their home recently at high valuations.
- Affordability concerns are increasing given strongly rising rents and higher mortgage rates.
- Close monitoring of the financial system amid tightening financial conditions remains important.
- Financial sector indicators:
- Household debt (percent of disposable income): 186 in 2018; 185 in 2019; 179 in 2020; 187 in 2021; 192 in 2022; 176 in 2023; 170 in 2024; 169 in 2025.
- Interest payments (percent of disposable income): 5.8 in 2018; 9.7 in 2019; 11.0 in 2020; 9.8 in 2021; 8.2 in 2022.
- Household savings (percent of disposable income): 5.9 in 2018; 15.5 in 2019; 13.1 in 2020; 9.1 in 2021; 9.5 in 2022; 8.8 in 2023.
- Credit to the private sector: 4.7 in 2018; 7.4 in 2019.
- Business credit (percent of GDP): 50.5 in 2018; 49.1 in 2019; 50.1 in 2020; 48.9 in 2021; 44.7 in 2022; 46.2 in 2023; 47.3 in 2024; 47.4 in 2025; 47.9 in 2026; 48.3 in 2027; 48.7 in 2028.
- Supervisory and resilience recommendations:
- The increase in banks’ required capital buffers is welcome.
- Monitor potential vulnerabilities from an expected increase in bank wholesale funding at a time of higher rates and slowing growth, despite liquidity coverage ratios being well above regulatory minimum requirements.
- Invest in and closely monitor defenses against potential cyberthreats on financial infrastructure; undertake contingency planning.
- Close scrutiny of non-bank financial institutions is important given their rapid growth, albeit from a low base.
- Expand financial integrity regulation to cover DNFBPs and enhance beneficial ownership transparency.
Climate policy and structural reforms
- Climate targets and policy guidance:
- Australia’s new 2030 Nationally Determined Contribution is broadly in line with the long-term goal of reaching net zero greenhouse gas emissions by 2050.
- The new Climate Change Act creates a framework for accountability and future action to meet the target.
- Policy recommendations:
- A broad-based carbon price, coupled with measures to mitigate transition risks for impacted regions and industries, remains the most cost-effective way to achieve abatement goals.
- If an economy-wide carbon price is politically infeasible, alternative sectoral policies with price signals where possible can help reduce emissions.
- Planned reforms to the Safeguard Mechanism for industrial emissions are welcome.
- Adding price signals in the energy and transport sectors, potentially in the form of feebates, can further incentivize emissions reduction.
- Structural reforms to boost productivity and inclusion:
- Delivering quality infrastructure will require further streamlining the infrastructure pipeline and working with the construction sector to overcome capacity constraints.
- Recent initiatives to tackle skill shortages—free vocational training, expansion of university capacity, and a temporary increase in migration—are welcome.
- Scope remains to further boost innovation, promote competition, and improve education outcomes.
- Continued support for an open trade environment, including through reforms at the WTO, is welcomed.
Key macroeconomic and prices indicators (selected)
- Terms of trade index (goods, avg): 119 in 2021; 105 in 2022; 99 in 2023.
- % change: 8.3 in 2019; 21.8 in 2020; 8.1 in 2021; -11.1 in 2022; -0.4 in 2023; -0.1 in 2024.
- Iron ore prices (index): 228 in 2021; 171 in 2022; 136 in 2023.
- Consumer prices (avg): 6.7 in 2022; 5.5 in 2023.
- Core consumer prices (avg): 5.7 in 2022.
- Reserve Bank of Australia cash rate target (percent, avg): 6.6 in 2022; 7.1 in 2023; 7.0 in 2024; 6.3 in 2025.
- 10-year treasury bond yield (percent, avg): 1.4 (year not specified in source table).
Source: IMF Executive Board Concludes 2022 Article IV Consultation with Australia (Press Release No. 23/16).