IMF Executive Board Concludes 2023 Article IV Consultation with Australia
January 18, 2024
Washington, DC: The Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation [1] with Australia.
Australia’s post-pandemic recovery remained strong. However, growth is weakening on the heels of tighter macroeconomic policies and financial conditions. While inflation has peaked, it remains persistently high. The labor market shows signs of easing, and the positive output gap is narrowing. Increased cost of living is weighing on household consumption. The economy remains resilient in the near term but confronts a sustained slowdown in productivity growth. Risks to the growth outlook are balanced, with upside risks stemming from robust immigration. Financial stability risks remain contained despite pockets of vulnerability and higher risks related to global financial conditions.
Economic activity is projected to further decelerate in the near term, as the tightening of monetary conditions continues to take hold. Growth is expected to slow to around 1.8 percent y/y in 2023 and 1.4 percent y/y in 2024. Faltering private consumption would continue to put a drag on the economy, as households with mortgages bear the brunt of higher interest rates, amidst lower real wages and depleting savings.
Under staff’s baseline projections, inflation would decline gradually and return to the RBA’s target range in 2026. While external price pressures have abated, leading to an easing in goods inflation, persistence in non-tradeable prices driven by demand pressures will keep inflation elevated. A positive output gap, amidst tight labor markets, would exert price pressures in the near term. In addition, while real wage growth has been negative, the pick-up recorded in recent quarters could delay disinflation. The recent strong net migration inflows are expected to further alleviate labor market tightness but add to demand, especially in the rental market.
Executive Board Assessment[2]
Executive Directors commended Australia’s sound macroeconomic policies which ensured strong recovery and resilience. In the context of necessary macroeconomic policy tightening, Directors observed that growth is expected to slow, and inflation is gradually declining, albeit from above the target range. Directors highlighted the importance of continued monetary and fiscal policy coordination to reduce inflation and recommended reforms to promote productivity growth and the green transition.
Directors welcomed the authorities’ progress on fiscal consolidation and commitment to debt sustainability. They underscored the need for a tighter fiscal stance to support disinflation. In that context, Directors saw merit in a comprehensive tax reform and highlighted that rebalancing the tax system from direct to indirect taxes, while addressing regressive impacts, would promote greater efficiency. Directors also recognized the measures taken to contain spending growth and underscored the importance of well‑targeted support for vulnerable households. Implementing public investment projects at a more measured pace would also support disinflation efforts.
Directors highlighted the potential need for further monetary tightening to achieve the targeted inflation range by 2025 and recommended a data‑dependent approach. They welcomed measures taken to bolster financial stability and the swift progress on implementing FSAP recommendations. Directors encouraged continued strengthening of macroprudential decision‑making and crisis management and resolution frameworks . They stressed the importance of continued vigilance amidst tight financial conditions.
Noting the renewed increases in house prices, Directors recommended the adoption of additional borrower‑based prudential tools. They supported the initiatives to boost housing supply to improve affordability and emphasized the criticality of supportive planning and land‑use policies.
Directors commended the authorities for their recent measures to tackle skill shortages and improve labor market outcomes, particularly for women. They stressed the need for further reforms to reignite productivity growth and foster inclusion. They also commended Australia’s continued support for multilateral institutions, for an open trade environment and the country’s voluntary participation in the review of transnational aspects of corruption.
Directors welcomed Australia’s efforts to meet its climate mitigation targets. While highlighting the important role that the Safeguards Mechanism could play in reducing emissions, Directors recognized that meeting the 2030 climate target will be challenging. They thus encouraged the authorities to consider additional efforts to achieve the net zero emission target by 2050. Noting that alternative sectoral policies can help reduce emissions, Directors welcomed the focus on developing sectoral decarbonization plans.
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Table 1. Australia: Main Economic Indicators, 2018-2028 |
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(Annual percent change, unless otherwise indicated) |
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2018 |
2019 |
2020 |
2021 |
2022 |
2023 |
2024 |
2025 |
2026 |
2027 |
2028 |
|
|
Projections |
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NATIONAL ACCOUNTS |
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|
Real GDP |
2.8 |
1.9 |
-1.8 |
5.2 |
3.7 |
1.8 |
1.4 |
2.0 |
2.2 |
2.3 |
2.3 |
|
Domestic demand |
2.7 |
1.2 |
-2.2 |
6.0 |
4.7 |
1.7 |
1.2 |
2.0 |
2.2 |
2.3 |
2.3 |
|
Private consumption |
2.4 |
1.1 |
-5.8 |
5.0 |
6.5 |
1.2 |
0.8 |
2.0 |
2.7 |
2.9 |
2.9 |
|
Public consumption |
4.1 |
6.2 |
7.7 |
5.4 |
5.2 |
0.9 |
0.8 |
0.9 |
0.6 |
0.5 |
0.6 |
|
Investment |
2.3 |
-2.5 |
-2.8 |
10.5 |
1.2 |
4.0 |
2.6 |
3.3 |
2.9 |
2.8 |
2.8 |
|
Public |
2.7 |
2.1 |
-0.6 |
7.0 |
3.5 |
9.0 |
3.0 |
2.2 |
0.9 |
0.4 |
0.4 |
|
Private business |
2.6 |
-0.8 |
-3.8 |
8.9 |
3.9 |
6.7 |
4.0 |
4.7 |
4.1 |
3.9 |
3.7 |
|
Dwelling |
4.3 |
-7.2 |
-5.6 |
9.9 |
-3.5 |
-2.2 |
-0.7 |
1.5 |
2.5 |
2.6 |
2.8 |
|
Net exports (contribution to growth, percentage points) |
0.4 |
1.0 |
0.1 |
-1.4 |
-1.6 |
1.1 |
0.2 |
0.0 |
0.0 |
0.0 |
0.0 |
|
Gross domestic income |
3.3 |
3.2 |
-1.9 |
8.9 |
5.2 |
0.1 |
-0.7 |
1.8 |
2.2 |
2.3 |
2.4 |
|
Investment (percent of GDP) 1/ |
24.2 |
22.6 |
22.3 |
23.1 |
23.3 |
23.8 |
24.8 |
25.0 |
25.2 |
25.3 |
25.4 |
|
Public |
5.1 |
5.1 |
5.2 |
5.0 |
5.0 |
5.6 |
5.9 |
5.9 |
5.8 |
5.7 |
5.6 |
|
Private |
18.9 |
17.6 |
17.3 |
18.0 |
17.7 |
18.3 |
18.9 |
19.2 |
19.4 |
19.6 |
19.8 |
|
Savings (gross, percent of GDP) |
22.0 |
23.1 |
24.5 |
26.2 |
24.7 |
24.4 |
24.3 |
24.5 |
24.6 |
24.6 |
24.7 |
|
Households |
9.3 |
9.9 |
17.0 |
14.6 |
10.3 |
8.0 |
8.2 |
9.1 |
8.9 |
9.5 |
9.3 |
|
Potential output |
2.4 |
2.3 |
1.3 |
1.5 |
1.9 |
2.0 |
2.1 |
2.3 |
2.1 |
2.3 |
2.4 |
|
Output gap (percent of potential) |
-0.7 |
-1.0 |
-4.0 |
-0.5 |
1.2 |
1.1 |
0.4 |
0.0 |
0.1 |
0.1 |
0.0 |
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LABOR MARKET |
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Employment |
2.7 |
2.3 |
-1.6 |
3.1 |
4.3 |
2.2 |
1.1 |
1.5 |
1.5 |
1.7 |
1.6 |
|
Unemployment (percent of labor force) |
5.3 |
5.2 |
6.5 |
5.1 |
3.7 |
3.7 |
4.2 |
4.4 |
4.6 |
4.6 |
4.6 |
|
Wages (nominal percent change) |
2.1 |
2.3 |
1.6 |
2.0 |
3.0 |
4.2 |
4.1 |
4.0 |
3.7 |
3.6 |
3.0 |
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PRICES |
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Terms of trade index (goods, avg) |
83 |
90 |
90 |
109 |
120 |
108 |
96 |
95 |
95 |
95 |
95 |
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% change |
3.2 |
8.4 |
0.3 |
21.4 |
9.6 |
-9.9 |
-11.3 |
-0.8 |
-0.1 |
-0.1 |
0.2 |
|
Iron ore prices (index) |
101 |
135 |
156 |
228 |
174 |
161 |
137 |
124 |
114 |
109 |
105 |
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Consumer prices (avg) |
1.9 |
1.6 |
0.9 |
2.8 |
6.6 |
5.8 |
4.0 |
3.2 |
2.8 |
2.7 |
2.6 |
|
Core consumer prices (avg) |
1.6 |
1.6 |
1.2 |
2.8 |
5.7 |
5.5 |
3.9 |
3.2 |
2.8 |
2.7 |
2.6 |
|
GDP deflator (avg) |
2.2 |
3.2 |
0.8 |
5.6 |
7.9 |
1.7 |
0.7 |
3.0 |
2.6 |
2.6 |
2.6 |
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FINANCIAL |
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Reserve Bank of Australia cash rate target (percent, avg) |
1.5 |
1.2 |
0.3 |
0.1 |
1.6 |
4.0 |
4.4 |
4.0 |
3.5 |
3.1 |
3.0 |
|
10-year treasury bond yield (percent, avg) |
2.6 |
1.4 |
0.9 |
1.6 |
3.6 |
3.9 |
4.3 |
4.5 |
4.4 |
4.1 |
4.0 |
|
Mortgage lending rate (percent, avg) |
5.3 |
4.8 |
4.5 |
4.5 |
7.3 |
8.3 |
8.3 |
8.1 |
7.6 |
7.4 |
7.4 |
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MACRO-FINANCIAL |
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Credit to the private sector |
4.7 |
2.5 |
2.1 |
7.4 |
8.4 |
7.8 |
4.1 |
4.3 |
4.5 |
4.5 |
4.6 |
|
House prices (% change) |
-5.1 |
2.5 |
3.6 |
23.7 |
-5.6 |
7.1 |
5.1 |
5.2 |
5.1 |
5.2 |
5.2 |
|
House price-to-income, capital cities (ratio) |
4.3 |
4.3 |
4.2 |
4.9 |
4.5 |
4.9 |
4.7 |
4.7 |
4.7 |
4.6 |
4.6 |
|
Interest payments (percent of disposable income) |
8.9 |
7.0 |
5.8 |
5.2 |
10.8 |
13.3 |
12.6 |
11.9 |
11.0 |
10.4 |
10.4 |
|
Household savings (percent of disposable income) |
4.6 |
5.9 |
15.5 |
13.1 |
7.0 |
2.9 |
-5.1 |
-0.3 |
2.0 |
3.3 |
3.4 |
|
Household debt (percent of disposable income) 2/ |
186 |
185 |
179 |
187 |
187 |
193 |
190 |
183 |
182 |
179 |
179 |
|
Business credit (percent of GDP) |
50.4 |
49.1 |
50.1 |
48.9 |
49.3 |
52.4 |
54.1 |
54.5 |
55.1 |
55.6 |
56.1 |
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GENERAL GOVERNMENT (percent of GDP) 3/ |
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Revenue |
35.6 |
35.7 |
34.5 |
35.0 |
36.0 |
36.4 |
37.3 |
35.6 |
35.5 |
35.1 |
35.1 |
|
Expenditure |
36.8 |
36.9 |
42.1 |
44.3 |
40.0 |
37.2 |
39.2 |
38.0 |
36.9 |
36.6 |
36.3 |
|
Net lending/borrowing |
-1.3 |
-1.2 |
-7.7 |
-9.3 |
-4.0 |
-0.8 |
-1.9 |
-2.3 |
-1.4 |
-1.5 |
-1.2 |
|
Commonwealth only |
-0.5 |
-0.1 |
-4.8 |
-6.9 |
-1.3 |
1.1 |
-0.3 |
-1.3 |
-1.0 |
-0.9 |
-0.7 |
|
Operating balance |
0.6 |
0.9 |
-5.5 |
-7.0 |
-1.5 |
1.5 |
0.0 |
-0.6 |
-0.2 |
0.0 |
0.3 |
|
Cyclically adjusted primary balance |
0.4 |
0.5 |
-5.0 |
-7.1 |
-2.8 |
0.0 |
0.0 |
-0.3 |
0.8 |
0.7 |
0.9 |
|
Gross debt |
41.3 |
42.2 |
52.7 |
58.3 |
53.5 |
49.5 |
54.4 |
55.3 |
56.0 |
56.0 |
55.2 |
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Net debt |
23.7 |
24.5 |
32.1 |
38.0 |
33.7 |
27.1 |
31.3 |
33.4 |
34.3 |
34.3 |
33.9 |
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BALANCE OF PAYMENTS |
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Current account (percent of GDP) |
-2.2 |
0.4 |
2.2 |
3.0 |
1.1 |
0.7 |
-0.5 |
-0.6 |
-0.6 |
-0.7 |
-0.6 |
|
Export volume |
5.1 |
3.2 |
-9.7 |
-2.0 |
3.4 |
8.5 |
2.6 |
2.0 |
2.1 |
2.2 |
2.3 |
|
Import volume |
4.3 |
-1.1 |
-12.8 |
5.4 |
12.9 |
4.0 |
2.2 |
2.4 |
2.4 |
2.4 |
2.4 |
|
Net international investment position (percent of GDP) |
-57.0 |
-50.1 |
-53.0 |
-38.3 |
-38.2 |
-32.5 |
-32.3 |
-31.4 |
-30.5 |
-29.7 |
-29.0 |
|
Gross official reserves (bn A$) |
76 |
84 |
56 |
81 |
85 |
… |
… |
… |
… |
… |
… |
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MEMORANDUM ITEMSW |
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Nominal GDP (bn A$) |
1,894 |
1,992 |
1,971 |
2,189 |
2,450 |
2,536 |
2,591 |
2,721 |
2,853 |
2,995 |
3,143 |
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Percent change |
5.1 |
5.2 |
-1.1 |
11.0 |
11.9 |
3.5 |
2.2 |
5.0 |
4.8 |
5.0 |
4.9 |
|
Real GDP per capita (% change) |
1.3 |
0.4 |
-2.8 |
4.9 |
2.2 |
0.8 |
0.2 |
0.7 |
1.0 |
1.1 |
1.1 |
|
Population (million) |
25.1 |
25.5 |
25.6 |
25.8 |
26.3 |
26.6 |
26.9 |
27.3 |
27.6 |
27.9 |
28.3 |
|
Nominal effective exchange rate |
90.0 |
86.3 |
86.0 |
90.8 |
90.3 |
… |
… |
… |
… |
… |
… |
|
Real effective exchange rate |
90.0 |
86.0 |
85.3 |
90.5 |
90.7 |
… |
… |
… |
… |
… |
… |
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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 |
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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/ Fiscal year ending June. |
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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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