Australia remains in a stronger position than many advanced economies, according to a new assessment by the International Monetary Fund (IMF), but a number of key downside risks are said to be dominating the country’s economic outlook.
In its assessment, the IMF said that the Australian economy is on a narrow path to a soft landing, with GDP growth forecast to slow to 1.6 per cent in 2023, down from around 3.6 per cent in 2022, as higher rates and weaker global growth impact domestic demand and net exports.
“While labor markets confront significant tightening, wage growth thus far has remained modest relative to many other advanced economies. Inflation has nonetheless risen to significantly above the RBA’s target, driven both by high commodity prices and strong domestic demand, prompting decisive monetary policy tightening,” the IMF noted.
“Fiscal policy consolidated significantly in FY 2021–22 with the ending of pandemic-era support measures, and the pace of tightening is slowing significantly in the current fiscal year.”
The IMF predicted that inflation will move gradually towards the RBA’s target band of 2 to 3 per cent by the end of 2024 but warned that this outcome is subject to significant uncertainty.
According to the global body, Australia’s current cash rate of 3.1 per cent is in “broadly neutral territory”, with a peak of around 3.85 per cent expected in the second quarter.
“The significant rate hikes to date and uncertainty about the strength and lags of transmission channels imply high uncertainty for monetary policy going forward,” it said.
While Australia’s economy is expected to come to a soft landing this year, the IMF warned that risks to this outlook are skewed “significantly to the downside”.
“Tighter financial conditions, erosion of real incomes amid high inflation, declining housing prices, and soft global growth point to a significant deceleration in Australia,” the body said.
In regards to policy recommendations, the IMF suggested that the country’s macroeconomic policies should continue to tighten in the near term, rebalancing domestic demand and supply, and putting priority on a sustainable return of inflation to target.
“The RBA should continue raising interest rates, with the pace remaining data-dependent. Near-term fiscal restraint will help support monetary policy in holding back excess demand,” it said.
“Medium-term fiscal policy should ensure credible consolidation amid structural spending pressures, and tax reforms should help mobilise revenues, strengthen economic efficiency, and improve equity.”
While Australia’s financial and macroprudential policies were considered to be adequate, the IMF added that ongoing monitoring of risks is warranted due to potential pockets of vulnerability resulting from the interaction of higher rates, high household debt, and falling housing prices.
In a statement, Treasurer Jim Chalmers described the IMF’s assessment as a “glowing report card” for the federal government’s budget and economic plan.
“The report is another reminder that in the face of a challenging international outlook, our economy has a lot going for it: historically low unemployment, good prices for our exports, and the beginnings of wages growth after a decade of stagnant wages,” he said.
“The IMF confirms that — despite a difficult year ahead — Australians have every right to be optimistic about the future of our economy and our country.”
Jon Bragg
Jon Bragg is a journalist for Momentum Media's Investor Daily, nestegg and ifa. He enjoys writing about a wide variety of financial topics and issues and exploring the many implications they have on all aspects of life.
