IMF Executive Board Concludes 2018 Article IV Consultation with Australia
February 21, 2019
On February 4, 2019, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation [1] with Australia.
Australia has advanced further in its economic rebalancing after the end of the mining investment boom of the 2000s. Economic growth picked up to rates above that of potential output in the first half of 2018, with solid private and public consumption and residential investment more than offsetting the drag from delays in public investment plans and drought. Growth slowed down somewhat in 2018Q3. Labor market conditions also improved, with strong employment growth and declining unemployment.
The housing market has been cooling after a long boom. The cooling since mid-2017 reflects a number of factors, including the bottoming out of interest rates globally, the weakening of foreign and domestic investor demand, and the tightening of lending standards and bank capital requirements. The housing market correction is helping housing affordability, but accumulated vulnerabilities related to house prices and debt levels remain high. On the supply side, progress has been made in using City Deals, agreements across all levels of government that integrate planning and infrastructure delivery for new developments and redevelopments.
The fiscal policy stance has been supportive, with increased infrastructure spending. The Commonwealth government deficit has narrowed to 0.3 percent of GDP and should move into surplus in FY2019/20. The authorities have accelerated the lowering of the company tax rate for small companies with a turnover of up to A$50 million to 25 percent by FY2021/22 and set up a schedule for cutting personal income taxes and rationalizing the tax brackets over the next seven years. This should maintain a tax-to-GDP ceiling at the federal level of 23.9 percent of GDP while protecting its commitment to a budget surplus of 1 percent of GDP over the business cycle as a medium-term fiscal anchor.
The monetary policy stance remains accommodative, with the current policy rate being on hold at 1.5 percent since August 2016 and inflation hovering just below the lower end of the Reserve Bank of Australia’s (RBA’s) target range of 2-3 percent. The cash rate setting implies a real policy rate of zero relative to estimates of the real neutral interest rate in the range of 1-2 percent.
Australian banks are well capitalized and profitable. In 2018Q3 compared with end-2017, banks’ regulatory capital to risk-weighted assets ratio remained stable at 14.7 percent, and the return on assets increased by 0.2 percentage point to 1.4 percent. The ratio of liquid assets to total assets remained relatively stable at 17.2 percent in 2018Q3. Stress tests under Financial Sector Assessment Program (FSAP), conducted in parallel with the Article IV consultation, found banks to be resilient to solvency and liquidity stress but also noted the vulnerability to external funding shocks, given that banks’ wholesale funding accounts for about one-third of total liabilities, of which two-thirds are from external sources.
The Australian Prudential Regulatory Authorities (APRA) continues to put strong emphasis on sound lending standards, and conditional on a bank’s assurance about such standards, it removed caps limiting investor and interest-only lending in 2018. The capital adequacy framework for banks was further refined in 2018, with APRA establishing a framework and timeline for introducing a minimum leverage ratio for Australian banks and proposing changes to increase banks’ loss absorbing capacity.
Recent structural policy efforts have focused on addressing infrastructure gaps, research and development (R&D), tax reform, and energy policy. Federal and state governments have ramped up infrastructure spending further, adding around 0.5 percent of GDP per year in the 2018 budgets and updates over the next 3 years. The federal government has reformed the system of R&D tax incentives to make it more efficient. They have also cut personal income and company taxes as outlined above. Energy sector reform for reliability issues has proceeded at federal and state levels, and the government remains committed to meeting its Paris Agreement obligations.
Executive Board Assessment [2]
Executive Directors commended the authorities for their sound macroeconomic management and strong policy framework which have contributed to over two decades of robust and resilient economic performance. Directors noted that although growth is expected to remain above trend in the near term, a weaker global economic environment, high household debt, and vulnerabilities in the housing sector could weigh on medium‑term growth. Against this background, they highlighted the importance of maintaining supportive macroeconomic policies to secure stronger demand momentum, address macrofinancial risks, and boost long‑term productivity and potential growth.
Directors agreed that continued macroeconomic policy support is essential until full employment and the inflation target are firmly within reach. They considered monetary policy to be appropriately accommodative in the current circumstances and advised that policy normalization should depend on firmer upward pressures on prices.
Directors welcomed the supportive fiscal policy stance. They commended Australia’s infrastructure investment boost as a critical source of demand in the near term. Directors also welcomed the authorities’ prudent medium‑term fiscal plans, targeting budget surpluses from FY2019/20. The principle of running budget surpluses in good times has been an important anchor for fiscal discipline in Australia. Directors generally considered that a medium‑term debt anchor could further help strengthen the medium‑term fiscal strategy. Noting the uncertainty about the recent strength in revenues, Directors encouraged the authorities to exercise prudence in approving permanent tax cuts or expenditure increases.
Directors agreed that the macroeconomic policy response needs to be flexible. They noted that given limited conventional monetary policy space, discretionary fiscal stimulus may need to complement monetary easing in the event downside risks materialize. Most Directors noted that Australia’s substantial fiscal space could be utilized for further increases in high‑quality infrastructure spending to boost potential growth. At the same time, a number of Directors noted that the fiscal space could be preserved as a buffer to deal with shocks.
Directors welcomed the authorities’ macroprudential interventions to reduce credit risk and reinforce sound lending standards. They concurred that, with high prices for residential real estate along with elevated household debt, macroprudential policies should hold the course on the improved lending standards and further strengthen bank resilience by refining the capital adequacy framework. Directors also saw merit in expanding and strengthening the macroprudential toolkit to allow for more flexible responses to financial stability risks.
Directors welcomed that Australia’s financial system remains fundamentally sound. They supported the FSAP recommendations to strengthen systemic risk oversight of the financial sector. They generally noted that the quality of supervision would be further bolstered by strengthening enforcement powers to support effective risk management and by making additional investment in data and analytical tools. Directors encouraged the authorities to strengthen the integration of systemic risk analysis and stress testing with supervisory processes, complete the resolution framework, and expedite the development of bank‑specific resolution plans.
Directors underscored the need to remain vigilant about housing market developments. They noted that while the housing market correction is helping housing affordability, continued housing supply reforms remain critical for broad affordability and to reduce macrofinancial vulnerabilities. Directors generally encouraged the authorities to explore, where possible, alternative and effective non‑discriminatory measures for buyers.
Directors stressed that to lift productivity and longer‑term growth, sustained structural policy efforts will be needed. These should focus on continuing to close macro‑critical gaps in infrastructure, greater female labor force participation, research and development, sustainability of energy policy, as well as broad tax reform. Directors welcomed the authorities’ commitment to openness and trade and their participation in the Comprehensive and Progressive Agreement for Trans‑Pacific Partnership.
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Table 1. Australia: Main Economic Indicators, 2014-2024 |
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(Annual percent change, unless otherwise indicated) |
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2014 |
2015 |
2016 |
2017 |
2018 |
2019 |
2020 |
2021 |
2022 |
2023 |
2024 |
|
|
Est. |
Projections |
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|
NATIONAL ACCOUNTS |
|||||||||||
|
Real GDP |
2.6 |
2.5 |
2.8 |
2.4 |
3.0 |
2.7 |
2.6 |
2.6 |
2.6 |
2.6 |
2.6 |
|
Domestic demand |
0.9 |
1.2 |
1.8 |
2.9 |
3.0 |
2.6 |
2.7 |
2.6 |
2.6 |
2.6 |
2.6 |
|
Private consumption |
2.5 |
2.4 |
2.7 |
2.4 |
2.6 |
2.5 |
2.7 |
2.6 |
2.6 |
2.6 |
2.6 |
|
Public consumption |
0.3 |
4.4 |
4.8 |
4.0 |
4.1 |
2.8 |
2.4 |
2.0 |
2.1 |
2.2 |
2.2 |
|
Investment |
-1.9 |
-3.6 |
-2.3 |
3.0 |
2.9 |
2.3 |
2.7 |
3.0 |
2.9 |
2.8 |
2.8 |
|
Public |
-3.3 |
-1.8 |
13.3 |
9.1 |
0.2 |
5.4 |
1.5 |
0.6 |
0.4 |
0.4 |
0.4 |
|
Private business |
-6.1 |
-9.6 |
-11.2 |
3.2 |
4.0 |
3.7 |
4.9 |
4.3 |
4.3 |
4.2 |
4.3 |
|
Dwelling |
9.6 |
8.9 |
7.9 |
-2.4 |
5.5 |
-1.3 |
-0.1 |
2.4 |
2.3 |
2.0 |
1.7 |
|
Net exports (contribution to growth, percentage points) |
1.6 |
0.9 |
1.3 |
-0.8 |
0.3 |
0.2 |
0.0 |
0.1 |
0.1 |
0.1 |
0.1 |
|
Gross domestic income |
1.0 |
-0.1 |
2.8 |
4.8 |
3.1 |
1.7 |
2.5 |
2.2 |
2.3 |
2.6 |
2.7 |
|
Investment (percent of GDP) 1/ |
26.4 |
25.9 |
24.7 |
24.1 |
24.3 |
24.2 |
24.2 |
24.2 |
24.2 |
24.1 |
23.9 |
|
Public |
4.4 |
4.4 |
4.8 |
5.0 |
4.9 |
5.0 |
4.9 |
4.8 |
4.7 |
4.6 |
4.4 |
|
Private |
22.0 |
21.4 |
19.7 |
19.1 |
19.3 |
19.2 |
19.2 |
19.3 |
19.4 |
19.4 |
19.4 |
|
Mining investment |
7.1 |
5.4 |
3.9 |
3.1 |
2.8 |
2.7 |
2.7 |
2.7 |
2.6 |
2.6 |
2.6 |
|
Non-mining investment |
15.0 |
16.1 |
15.9 |
16.0 |
16.4 |
16.4 |
16.5 |
16.6 |
16.8 |
16.8 |
16.9 |
|
Savings (gross, percent of GDP) |
23.3 |
21.6 |
20.9 |
22.0 |
21.7 |
21.5 |
21.3 |
21.2 |
21.1 |
21.1 |
21.2 |
|
Potential output |
2.8 |
2.6 |
2.5 |
2.5 |
2.6 |
2.5 |
2.6 |
2.6 |
2.6 |
2.6 |
2.6 |
|
Output gap (percent of potential) |
-0.9 |
-1.0 |
-0.8 |
-0.9 |
-0.5 |
-0.3 |
-0.2 |
-0.1 |
-0.1 |
0.0 |
0.0 |
|
LABOR MARKET |
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|
Employment |
0.6 |
2.0 |
1.8 |
2.3 |
2.7 |
2.1 |
1.9 |
1.7 |
1.7 |
1.7 |
1.7 |
|
Unemployment (percent of labor force) |
6.1 |
6.1 |
5.7 |
5.6 |
5.3 |
4.8 |
4.8 |
4.8 |
4.8 |
4.8 |
4.8 |
|
Wages (nominal percent change) |
2.5 |
2.1 |
1.9 |
1.9 |
2.1 |
2.5 |
3.0 |
3.3 |
3.2 |
3.3 |
3.3 |
|
PRICES |
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|
Terms of trade index (goods, avg) |
103 |
90 |
90 |
103 |
104 |
98 |
97 |
95 |
94 |
94 |
94 |
|
% change |
-8.0 |
-12.4 |
-0.4 |
14.4 |
0.9 |
-5.5 |
-0.8 |
-1.8 |
-1.4 |
-0.3 |
0.5 |
|
Iron ore prices (index) |
77 |
44 |
46 |
56 |
55 |
48 |
47 |
47 |
47 |
47 |
47 |
|
Coal prices (index) |
81 |
67 |
75 |
101 |
120 |
108 |
102 |
99 |
99 |
99 |
99 |
|
LNG prices (index) |
95 |
61 |
42 |
41 |
56 |
49 |
45 |
44 |
44 |
44 |
44 |
|
Crude prices (Brent; index) |
91 |
48 |
40 |
50 |
65 |
57 |
57 |
56 |
57 |
57 |
58 |
|
Consumer prices (avg) |
2.5 |
1.5 |
1.3 |
2.0 |
2.0 |
2.1 |
2.4 |
2.5 |
2.5 |
2.5 |
2.5 |
|
Core consumer prices (avg) |
2.6 |
2.3 |
1.7 |
1.6 |
1.6 |
2.1 |
2.3 |
2.5 |
2.5 |
2.5 |
2.5 |
|
GDP deflator (avg) |
0.3 |
-0.8 |
1.0 |
3.6 |
1.7 |
1.0 |
2.1 |
2.1 |
2.3 |
2.6 |
2.4 |
|
FINANCIAL |
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|
Reserve Bank of Australia cash rate (percent, avg) |
2.5 |
2.1 |
1.7 |
1.5 |
1.5 |
1.5 |
1.8 |
2.3 |
2.7 |
3.2 |
3.5 |
|
10-year treasury bond yield (percent, avg) |
3.7 |
2.7 |
2.3 |
2.6 |
2.8 |
3.2 |
3.5 |
4.0 |
4.5 |
5.0 |
5.1 |
|
Mortgage lending rate (percent, avg) |
6.0 |
5.6 |
5.4 |
5.2 |
5.6 |
5.6 |
6.1 |
6.6 |
7.1 |
7.6 |
7.6 |
|
MACRO-FINANCIAL |
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|
Credit to the private sector |
7.4 |
8.1 |
7.0 |
4.6 |
4.7 |
3.7 |
3.6 |
4.0 |
4.6 |
4.7 |
4.8 |
|
House price index |
120 |
131 |
141 |
148 |
141 |
135 |
136 |
137 |
141 |
144 |
148 |
|
% change |
6.7 |
8.7 |
7.7 |
5.0 |
-4.4 |
-4.1 |
0.3 |
1.0 |
2.5 |
2.5 |
2.5 |
|
House price-to-income, capital cities (ratio) |
4.2 |
4.5 |
4.7 |
4.8 |
4.5 |
4.1 |
3.9 |
3.8 |
3.7 |
3.6 |
3.5 |
|
Interest payments (percent of disposable income) |
8.9 |
8.8 |
8.6 |
8.9 |
9.7 |
9.2 |
9.9 |
10.6 |
11.3 |
11.9 |
11.8 |
|
Household savings (percent of disposable income) |
7.4 |
6.3 |
4.9 |
3.9 |
2.5 |
2.3 |
2.5 |
2.6 |
2.7 |
3.0 |
3.1 |
|
Household debt (percent of disposable income) 2/ |
167 |
173 |
180 |
187 |
188 |
176 |
174 |
171 |
169 |
167 |
165 |
|
Business credit (percent of GDP) |
48 |
51 |
51 |
50 |
50 |
50 |
50 |
50 |
50 |
50 |
50 |
|
GENERAL GOVERNMENT (percent of GDP) 3/ |
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|
Revenue |
33.9 |
34.6 |
34.8 |
34.9 |
35.6 |
36.0 |
35.9 |
35.8 |
35.7 |
35.6 |
35.6 |
|
Expenditure |
36.8 |
37.4 |
37.4 |
36.4 |
36.7 |
37.5 |
36.6 |
35.9 |
35.6 |
35.6 |
35.6 |
|
Net lending/borrowing |
-2.9 |
-2.8 |
-2.6 |
-1.5 |
-1.2 |
-1.5 |
-0.7 |
-0.1 |
0.1 |
0.0 |
0.0 |
|
Operating balance |
-1.6 |
-1.5 |
-1.1 |
-0.1 |
0.4 |
0.4 |
1.1 |
1.6 |
1.7 |
1.6 |
1.6 |
|
Cyclically adjusted balance |
-2.5 |
-2.4 |
-2.1 |
-1.1 |
-0.9 |
-1.3 |
-0.6 |
0.0 |
0.1 |
0.0 |
0.0 |
|
Gross debt |
34.1 |
37.8 |
40.5 |
40.7 |
40.7 |
41.4 |
40.8 |
40.1 |
39.3 |
37.9 |
36.7 |
|
Net debt |
15.5 |
17.9 |
18.9 |
18.4 |
19.3 |
20.6 |
20.3 |
19.8 |
19.1 |
18.0 |
17.0 |
|
Net worth |
52.0 |
49.4 |
49.3 |
49.0 |
48.6 |
50.3 |
50.3 |
50.4 |
50.0 |
49.1 |
48.5 |
|
BALANCE OF PAYMENTS |
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|
Current account (percent of GDP) |
-3.1 |
-4.6 |
-3.3 |
-2.6 |
-2.4 |
-2.7 |
-2.9 |
-3.0 |
-3.1 |
-3.0 |
-2.8 |
|
Export volume |
6.9 |
6.5 |
6.8 |
3.5 |
5.3 |
2.4 |
2.5 |
2.9 |
3.1 |
3.2 |
3.2 |
|
Import volume |
-1.4 |
1.9 |
0.1 |
7.7 |
3.8 |
1.7 |
2.6 |
2.7 |
2.9 |
2.9 |
2.9 |
|
Net international investment position (percent of GDP) |
-52 |
-56 |
-57 |
-54 |
-50 |
-51 |
-52 |
-52 |
-53 |
-53 |
-53 |
|
Gross official reserves (bn A$) |
66 |
63 |
74 |
85 |
… |
… |
… |
… |
… |
… |
… |
|
MEMORANDUM ITEMS |
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|
Nominal GDP (bn A$) |
1,615 |
1,641 |
1,704 |
1,808 |
1,894 |
1,965 |
2,059 |
2,158 |
2,265 |
2,385 |
2,506 |
|
Percent change |
3.0 |
1.6 |
3.9 |
6.1 |
4.8 |
3.7 |
4.8 |
4.8 |
5.0 |
5.3 |
5.1 |
|
Real net national disposable income per capita (% change) |
-0.8 |
-2.1 |
1.1 |
2.7 |
1.2 |
0.2 |
0.4 |
0.1 |
0.2 |
0.4 |
0.6 |
|
Population (million) |
23.6 |
24.0 |
24.4 |
24.8 |
25.2 |
25.6 |
26.0 |
26.4 |
26.8 |
27.2 |
27.7 |
|
Nominal effective exchange rate |
99 |
92 |
92 |
94 |
… |
… |
… |
… |
… |
… |
… |
|
Real effective exchange rate |
100 |
93 |
93 |
96 |
… |
… |
… |
… |
… |
… |
… |
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Sources: Authorities’ data; IMF World Economic Outlook database; and IMF staff estimates and projections. |
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1/ Includes changes in inventories. |
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2/ 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. |
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3/ Calendar year. |
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[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.
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