Australian economy can weather housing slump: IMF

After reviewing Australia’s economy, the International Monetary Fund (IMF) has stated that the nation is on the “final leg” of its economic recovery since the end of the mining investment boom.

Business investment and private consumption are expected to drive continued economic growth in the near term, placing “gradual upward pressure” on wages and inflation, which have been growing below the target range at 1.9 per cent per year.

“A stronger pickup in the non-mining business sector, larger spillovers from public infrastructure investment, and the Australian dollar depreciation in real effective terms over the past year could boost near-term growth more than projected,” the IMF said in its concluding statement to its Article IV mission, which involved consulting businesses, academics, officials and regulators over two weeks.

Housing market slump a positive for affordability

The IMF welcomed the cooldown of the housing market against a backdrop of strong economic growth (which was “well above 3 per cent” in 2018), explaining that this helps improve housing affordability.

It suggested, however, that housing supply reforms will be “critical to restoring housing affordability”.

“In the absence of a sharp rise in unemployment, interest rates or housing inventories, an orderly correction in housing prices will help contain macro-financial vulnerabilities. Pressures on housing affordability, which is critical for growth to remain inclusive, will be relieved in the process,” the IMF said.

No case yet for raising the cash rate

Until there is sufficient evidence of upticks in wages and inflation, the Reserve Bank of Australia’s “appropriately accommodative” policy of keeping the official cash rate at the record low of 1.5 per cent should continue, according to the IMF.

“Notwithstanding recent strong growth, it is not yet the time to withdraw macroeconomic policy support given remaining slack,” the IMF said in its report.

The IMF expects the federal budget to return to balance by the 2019–20 financial year, with surpluses to follow.

“Given the fiscal space, Australia remains in a position to respond flexibly in case large downside risks should materialise. A role for medium-term debt anchors as a complementary element in fiscal strategies might also be considered,” the IMF said.

Increasing oversight of financial sector could be helpful

According to the IMF, “further bolstering” oversight of systemic risks in the financial sector would be helpful.

This includes:

• “strengthening the transparency of the work of the Council of Financial Regulators on the identification of systemic risks and actions taken to mitigate them”;
• “improving the granularity and consistency of data collection and provision would support the analysis of systemic risks and formulation of policy”;
• “increasing the independence and budgetary autonomy of the regulatory agencies”;
• “strengthening the supervisory approach, particularly in the areas of governance, risk management and conduct”;
• “enhancing the stress testing framework for solvency, liquidity and contagion risks”;
• “integration of systemic risk analysis and stress testing into supervisory processes”;
• “completing the resolution policy framework”; and
• “expediting the development of bank-specific resolution plans”.

The IMF welcomed the boosts in funding for regulatory bodies, including $70 million for the Australian Securities and Investments Commission and $59 million for the Australian Prudential Regulation Authority.

Global risks could slow economic recovery

Despite its largely positive outlook, the IMF cautioned that global forces, such as the US–China trade war and slowing Chinese economy, could sting Australia’s economy, saying that the balance of risks to economic growth is “tilted to the downside with a less favourable global risk picture”.

“A weaker than expected near-term outlook in China, coupled with further rising global protectionism and trade tensions, could delay full closure of the output gap,” the IMF said in its report.

“A sharp tightening of global financial conditions could spill over into domestic financial markets, raising funding costs and lowering disposable income of debtors, with the impact also depending on the response of the Australian dollar.”

[Related: Industry at loggerheads over cause of housing slump]