IMF Executive Board Concludes 2016 Article IV Consultation with Australia

February 9, 2017

IMF Executive Board Concludes 2016 Article IV Consultation with Australia

On February 3, the Executive Board of the International Monetary Fund (IMF) concluded the 2016 Article IV consultation with Australia. [1]

Australia has enjoyed robust growth despite the commodity price and mining investment bust. The moderate impact of the large shocks since 2011 highlights the resilience of the economy and strong policy frameworks. From mid-2015, the recovery advanced with a marked pickup in activity, although underlying demand growth remained close to trend. Nevertheless, Australia has not been immune to some elements of the “new mediocre.” Wage and price pressures have been weak, underemployment has risen, and private business investment outside mining has been lackluster.

By some metrics, housing market conditions have cooled, in tandem with intensified prudential and regulatory steps, but risks related to house price and debt levels remain. In the continued low interest rate environment, house prices and household debt have risen further but house price growth has moderated. Intrinsic housing market risks are localized. Bank lending to household has slowed, especially in riskier loans, and banks have strengthened their balance sheets.

With inflation below the target range of 2-3 percent and a downshift in the path of inflation expectation in 2016, the Reserve Bank of Australia (RBA) lowered its policy rate by another 50 basis points to 1.5 percent. Core inflation has since stabilized at around 1.6 percent. Wage growth has remained weak, with nominal unit labor costs running at less than 0.5 percent on average, and cost pressures have been virtually absent suggesting that some economic slack is still present.

The federal government has recently aimed for substantial near-term fiscal consolidation but budget targets have not been met because of weaker nominal income. In the FY2016/17 budget, the government has projected a return to fiscal balance by FY2020/21. It has renewed its commitment to a federal government surplus of 1 percent of GDP over the business cycle as a medium-term fiscal anchor, which would imply a cumulative adjustment of up to 3.4 percent of GDP. The Mid-Year Economic and Fiscal Outlook 2016-17 (MYEFO) foresees a cumulative adjustment of the fiscal balance of 2.1 percent of GDP by end of FY2019/20, primarily related to stronger personal income tax collection due to bracket creep.

Recent structural reforms have focused on fostering innovation. The National Innovation and Science Agenda (NISA) includes measures to boost innovation and entrepreneurship in the high-tech sector, including through tax breaks. Legislation is being prepared for key components of the Harper Review, which has identified a number of reforms to boost competition and productivity in the services sectors, and to strengthen competition policy broadly.

Executive Board Assessment [2]

Executive Directors noted that Australia’s robust economic growth and low unemployment during the current terms-of-trade adjustment reflect the resilience of the economy and strong policy frameworks. While the balance of risks to the growth outlook has improved, there remain significant risks and uncertainties, notably weaker-than-expected domestic consumption, housing-related vulnerabilities, the rise in protectionist policies in the global economy, and a significant slowdown in Australia’s main trading partners. Against this background, Directors stressed the importance of maintaining supportive macroeconomic policies, addressing macro-financial vulnerabilities, and boosting long-term potential growth.

Directors noted that continued demand support is needed to ensure a smooth transition to non-mining growth. They agreed that, with inflation below target, still elevated underemployment, and remaining economic slack, the monetary policy stance should remain accommodative. Directors welcomed the authorities’ readiness to ease monetary policy further if warranted, and encouraged steps to improve policy communication.

Directors supported the government’s plans to balance its budget over four years and make its expenditure composition more growth-friendly. Many Directors saw scope for using the available fiscal space to support aggregate demand and structural fiscal reforms, as well as increase infrastructure investment. Many other Directors viewed the authorities’ front-loaded consolidation path as appropriately prudent under the current circumstances. Directors welcomed the intention to take a flexible approach if large downside risks materialize, noting that contingency plans would also be helpful. While the current medium-term fiscal framework has served the economy well, Directors recommended that the authorities continue to consider options to strengthen it further.

Directors commended the progress in enhancing prudential and regulatory measures to mitigate risks associated with the housing market, and in improving AML/CFT safeguards in the real estate sector. They encouraged the authorities to remain vigilant and continue to enhance the resilience of the banking system to shocks with macro-financial implications, including by encouraging banks to strengthen their capital position. Financial regulatory authorities would need to stand ready to intensify targeted prudential measures, if lending or house price growth were to re-accelerate, while advancing the implementation of the regulatory reform agenda.

Directors welcomed the government’s structural reform agenda to boost productivity through fostering innovation and strengthening competition, especially in the services sector. They commended the authorities for their commitment to an open economy in trade, foreign investment, and immigration.



[1] Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.

[2] At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in Summings Up can be found here: http://www.imf.org/external/np/sec/misc/qualifiers.htm .

Australia: Main Economic Indicators, 2012-2022

(Annual percent change, unless otherwise indicated)

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

Projections

NATIONAL ACCOUNTS

Real GDP

3.6

2.1

2.8

2.4

2.3

2.6

3.0

3.0

2.9

2.9

2.9

Domestic demand

4.2

0.7

1.2

1.3

1.5

2.3

3.0

2.9

2.9

2.8

2.8

Private consumption

2.3

1.7

2.8

2.7

2.7

2.9

3.0

3.0

3.0

3.0

3.0

Public consumption

2.5

1.1

1.0

3.4

3.8

1.7

1.6

1.7

1.7

1.8

1.8

Investment

9.1

-1.5

-1.7

-3.2

-2.8

1.7

3.8

3.5

3.3

3.1

3.1

Public

6.7

-10.6

-2.1

-2.2

8.7

3.0

2.0

1.5

0.7

0.0

0.0

Private business

15.3

-0.8

-5.0

-8.8

-10.3

0.5

4.9

4.6

4.6

4.5

4.5

Dwelling

-6.3

2.3

6.8

10.0

8.1

3.5

3.3

2.9

2.7

2.4

2.4

Net exports (contribution to growth, percentage points)

-0.2

1.5

1.5

0.8

1.2

0.1

0.1

0.1

0.1

0.1

0.1

Gross domestic income

1.3

1.3

1.2

-0.1

2.0

2.2

2.0

2.7

2.8

2.8

2.9

Investment (percent of GDP)

29.0

27.6

26.9

26.3

25.1

25.1

25.4

25.5

25.6

25.6

25.6

Public

5.3

4.6

4.5

4.4

4.7

4.8

4.8

4.7

4.6

4.4

4.3

Private

23.3

23.0

22.4

21.9

20.3

20.3

20.7

20.9

21.0

21.2

21.3

Mining investment

8.4

8.5

7.2

5.5

4.0

3.0

2.3

2.3

2.3

2.3

2.3

Non-mining investment

14.9

14.5

15.2

16.4

16.3

17.3

18.4

18.6

18.8

18.9

19.0

Savings (gross, percent of GDP)

24.6

24.4

23.9

22.1

21.6

21.6

21.3

21.5

21.6

21.6

21.6

Potential output

2.9

2.8

3.0

2.5

2.6

2.6

2.6

2.6

2.6

2.6

2.6

Output gap (percent of potential)

-0.5

-1.1

-1.3

-1.4

-1.7

-1.7

-1.3

-1.0

-0.7

-0.4

-0.1

LABOR MARKET

Employment

1.2

0.9

0.7

1.9

1.6

1.8

1.8

1.7

1.7

1.7

1.7

Unemployment (percent of labor force)

5.2

5.7

6.1

6.1

5.7

5.7

5.6

5.4

5.3

5.3

5.1

Wages (nominal percent change)

3.7

2.9

2.5

2.1

2.0

2.1

2.5

2.6

2.8

2.9

3.0

PRICES

Terms of trade index (goods, avg)

121

117

107

94

92

91

86

86

85

85

85

% change

-12.3

-3.4

-8.1

-12.5

-2.0

-1.1

-4.9

-1.0

-0.3

0.0

0.0

Iron ore prices (index)

101

107

77

44

46

55

45

39

39

39

39

Coal prices (index)

109

95

79

65

74

83

75

72

72

72

72

LNG prices (index)

102

97

95

61

43

48

48

48

48

48

48

Crude prices (Brent; index)

103

100

91

48

40

52

52

52

52

52

53

Consumer prices (avg)

1.7

2.5

2.5

1.5

1.3

2.0

2.4

2.5

2.5

2.5

2.5

GDP deflator (avg)

-0.2

1.3

0.2

-0.6

1.0

1.9

1.8

2.2

2.4

2.4

2.5

FINANCIAL

Reserve Bank of Australia cash rate (percent, avg)

10-year treasury bond yield (percent, avg)

3.5

3.7

3.7

2.7

2.1

2.0

2.5

2.8

3.1

3.4

3.5

Mortgage lending rate (percent, avg)

7.0

6.2

6.0

5.6

5.4

5.4

5.7

6.0

6.3

6.6

6.6

MACRO-FINANCIAL

Credit to the private sector

5.4

-1.7

7.4

8.1

6.5

5.0

5.2

4.7

4.4

4.2

4.1

House price index

102

113

120

131

138

145

152

158

164

169

174

% change

3.0

10.0

6.7

8.7

5.7

5.2

4.7

4.1

3.5

3.3

3.0

House price-to-income, capital cities

3.9

4.2

4.2

4.9

4.8

4.9

4.9

4.9

4.8

4.8

4.7

Interest payments (percent of disposable income)

9.8

8.8

8.8

8.6

7.8

8.5

9.1

9.6

10.0

10.1

10.2

Household savings (percent of disposable income)

8.0

8.3

8.1

6.4

6.1

6.2

5.9

5.6

5.4

5.2

5.0

Household debt (percent of disposable income) 1/

166

171

176

183

185

186

187

186

184

183.1

181.8

Non-financial corporate debt (percent of GDP)

49

48

49

51

52

51

52

52

52

52

52

GENERAL GOVERNMENT (percent of GDP) 2/

Revenue

33.3

33.9

34.1

34.6

34.6

34.6

34.9

35.2

35.5

35.6

35.7

Expenditure

36.7

36.7

37.0

37.3

37.4

37.1

36.5

35.9

35.5

35.4

35.4

Net lending/borrowing

-3.5

-2.8

-2.9

-2.7

-2.8

-2.5

-1.6

-0.7

0.1

0.2

0.3

Operating balance

-2.0

-1.5

-1.6

-1.5

-1.4

-1.0

-0.2

0.5

1.0

1.2

1.3

Cyclically adjusted balance

-3.1

-2.3

-2.3

-2.0

-2.0

-1.8

-1.0

-0.2

0.4

0.4

0.3

Gross debt

27.8

30.7

34.2

37.6

41.3

43.6

43.8

42.8

41.0

39.2

37.2

Net debt

11.2

13.2

15.5

17.8

20.1

21.4

21.7

21.0

19.6

18.1

16.5

Net worth

52.2

53.9

52.3

47.5

46.8

50.2

49.8

49.7

49.3

48.3

47.3

BALANCE OF PAYMENTS

Current account (percent of GDP)

-4.1

-3.2

-2.9

-4.8

-3.2

-3.5

-4.2

-4.1

-4.0

-4.0

-4.0

Export volume

5.7

5.8

6.9

6.1

6.6

4.2

4.1

4.1

4.0

4.0

4.0

Import volume

5.5

-2.2

-1.1

2.0

0.7

3.7

3.9

3.8

3.8

3.8

3.7

Net international investment position (percent of GDP)

Gross official reserves (bn US$)

47

59

66

67

…

…

…

…

…

…

…

MEMORANDUM ITEMS

Nominal GDP (bn A$)

1,507

1,559

1,606

1,634

1,688

1,766

1,851

1,948

2,052

2,162

2,281

Percent change

3.4

3.4

3.0

1.8

3.3

4.6

4.8

5.2

5.3

5.4

5.5

Real net national disposable income per capita (% change)

Population (million)

22.9

23.3

23.6

23.9

24.3

24.6

25.0

25.3

25.7

26.1

26.4

Nominal effective exchange rate

110

105

99

92

…

…

…

…

…

…

…

Real effective exchange rate

110

105

100

93

93

…

…

…

…

…

…

Sources: Authorities' data; IMF World Economic Outlook database; and IMF staff estimates and projections.

1/ Reflects the national accounts measure of household debt, including to the financial sector, state and federal governments and foreign overseas banks and

governments. It also includes other accounts payable to these sectors and a range of other smaller entities including pension funds.

2/ Calendar year.

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