IMF Concludes 2021 Article IV Consultation with Australia

Washington, DC: On November 22, 2021, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation[1]with Australia.

Australia’s economy has weathered the pandemic comparatively well. Underpinned by sound macroeconomic fundamentals, large-scale fiscal and monetary policy support helped lift the economy out of its first recession in three decades in the wake of the initial COVID-19 waves in 2020. Economic activity recovered to well above pre-pandemic levels by the second quarter of 2021, faster than in most other advanced economies, with adverse distributional consequences remaining contained. New outbreaks related to the Delta variant since June 2021 have posed new challenges, with a sizable loss in economic activity in the third quarter of 2021 and some regions, sectors, and workers disproportionately affected.

Australian banks have remained liquid and well-capitalized, and household and corporate balance sheets proved resilient. Surging house prices have raised concerns around affordability and financial vulnerabilities, and the authorities have tightened macroprudential policy.

Quickly rising vaccination rates offer a pathway to a new normal as the country gradually lifts restrictions and reopens its borders. Accommodative fiscal and monetary policies should soften the near-term economic impact and lay the foundation for post-lockdown recovery, with economic growth expected at 3.5 and 4.1 percent in 2021 and 2022, respectively. Temporary factors have pushed headline inflation to the top of the Reserve Bank of Australia’s 2-3 percent target range. Underlying inflation has remained lower and should gradually rise toward the mid-point of the target range.

Uncertainty around the economic outlook remains high, linked to the pandemic’s trajectory. Renewed domestic outbreaks that would slow economic activity and delay the reopening constitute important downside risks to growth, as does COVID-19’s impact on Australia’s trading partners. By contrast, effective containment of the pandemic during the reopening could restore sentiment more quickly, with a faster recovery in household consumption and business investment. Other risks pertain to prolonged global supply chain disruptions, tighter global financial conditions, geopolitical tensions, a house price correction, and climate-related events.

Executive Board Assessment[2]

Executive Directors agreed that Australia’s sound pre-crisis macroeconomic fundamentals and effective policy response helped cushion the pandemic’s impact and have supported the recovery. Directors encouraged accommodative and agile macroeconomic policies in the near term given the downside risks and uncertainty, complemented with structural reforms to boost productivity to lay the foundation for a sustainable, inclusive, and green recovery.

Directors commended the strong fiscal support provided in the context of the pandemic and noted that Australia continues to have substantial fiscal space. They supported further stimulus should downside risks materialize and stressed the need to ensure adequate support to vulnerable workers and businesses, including through active labor market policies. They generally encouraged tax reforms to gain efficiency, with a few Directors highlighting the case for rebalancing the tax system away from direct taxes towards indirect taxes.

Directors agreed that accommodative monetary policy has been instrumental in supporting the economic recovery. They underscored that monetary policy should remain data-dependent and well communicated, with policy normalization calibrated to the strength of the recovery and expected inflation. If inflationary pressures become more persistent, an earlier tightening may be warranted, while, conversely, additional support can be deployed in case downside risks materialize.

Directors welcomed the authorities’ commitment to continued reforms for enhancing financial sector resilience, including recently announced reforms to the bank capital framework and the financial market infrastructure. They encouraged further efforts in addressing rising financial risks from climate change and cyber-attacks, and underscored the importance of further strengthening the AML/CFT regime.

Directors underscored that surging house prices and elevated household debt raise concerns around increasing financial vulnerabilities and welcomed the recent macroprudential measure to mitigate emerging risks. They emphasized the need to closely monitor lending standards and tighten macroprudential policy further if risks continue to build. Directors also noted heightened concerns of housing affordability and encouraged the authorities to implement supply-side reforms to help alleviate the issue.

Directors welcomed the recently adopted target to reduce greenhouse gas emissions to net zero by 2050 and Australia’s commitment to increase investment in developing and deploying low-emissions technologies. They encouraged fast progress toward the net zero goal within a comprehensive policy framework. In that context, a number of Directors saw merit in a broad-based carbon price as an efficient policy option, while a few others considered technology-based approaches more feasible within the range of possible measures.

Directors encouraged reforms to reinvigorate productivity growth and support a sustainable and inclusive recovery. Efforts should continue to focus on advancing the deregulation agenda, supporting digitalization, enhancing innovation and competition. They expressed appreciation for the authorities’ continued support for an open trade environment.

Table 1. Australia: Main Economic Indicators, 2016-2026

(Annual percent change; unless otherwise indicated)

2016

2017

2018

2019

2020

2021

2022

2023

2024

2025

2026

Projections

NATIONAL ACCOUNTS

Real GDP

2.7

2.4

2.8

1.9

-2.4

3.5

4.1

2.6

2.6

2.6

2.6

Domestic demand

1.8

3.0

2.7

1.2

-2.6

4.5

4.7

2.9

2.7

2.7

2.7

Private consumption

2.7

2.4

2.5

1.2

-5.8

3.3

6.3

4.5

3.9

3.5

3.3

Public consumption

5.1

3.9

4.2

5.8

7.1

2.7

-0.8

-1.5

-0.2

0.3

0.4

Investment

-2.4

3.6

2.2

-2.5

-3.0

9.4

6.6

2.9

2.5

3.1

3.0

Public

13.9

10.8

3.1

3.1

1.2

10.3

5.8

-0.7

-1.2

0.1

0.5

Private business

-11.9

4.0

2.2

-1.1

-5.3

4.8

7.4

4.8

4.5

4.7

4.3

Dwelling

8.0

-2.1

4.3

-7.1

-5.3

11.2

5.4

2.8

2.2

2.9

2.8

Net exports (contribution to growth, percentage points)

1.5

-0.8

0.3

1.0

0.4

-1.5

-0.5

-0.3

-0.1

-0.1

-0.1

Gross domestic income

2.7

4.9

3.3

3.3

-2.5

7.7

2.9

2.6

2.5

2.5

2.5

Investment (percent of GDP) 1/

24.6

24.3

24.1

22.5

22.3

23.2

24.0

24.0

23.9

24.0

24.0

Public

4.8

5.1

5.1

5.2

5.3

5.5

5.7

5.5

5.3

5.1

5.0

Private

19.7

19.1

18.9

17.5

17.1

17.6

18.3

18.5

18.6

18.8

19.0

Savings (gross, percent of GDP)

20.8

22.0

21.9

23.3

24.6

26.8

25.4

24.5

23.8

23.6

23.5

Households

9.9

9.2

8.6

8.9

15.9

13.6

11.8

10.3

9.7

9.4

8.9

Non-financial corporations

9.6

10.2

9.9

11.2

17.0

13.9

14.5

14.5

14.3

14.4

14.6

S-I balance (percent of GDP)

Households

0.6

0.2

-0.1

1.3

8.3

5.4

3.3

1.8

1.2

0.8

0.4

Non-financial corporations

-1.6

-0.6

-0.9

0.9

7.2

3.5

3.6

3.6

3.4

3.5

3.7

Potential output

2.4

2.3

2.4

2.3

1.3

1.4

1.8

2.6

2.6

2.6

2.6

Output gap (percent of potential)

-0.9

-0.8

-0.4

-0.7

-4.3

-2.3

0.0

0.0

0.0

0.0

0.0

LABOR MARKET

Employment

1.8

2.3

2.7

2.3

-1.5

2.9

1.5

1.4

1.4

1.8

1.7

Unemployment (percent of labor force)

5.7

5.6

5.3

5.2

6.5

5.2

4.8

4.7

4.7

4.7

4.7

Wages (nominal percent change)

1.9

1.8

2.1

2.3

1.6

2.0

2.5

2.7

3.0

3.1

3.1

PRICES

Terms of trade index (goods, avg)

80

92

95

104

103

123

115

114

114

113

113

% change

-0.5

14.5

3.1

9.1

-0.3

18.7

-6.3

-0.4

-0.5

-0.5

-0.3

Iron ore prices (index)

85

103

101

135

156

247

195

195

195

195

195

Coal prices (index)

66

89

107

78

59

129

125

107

105

105

104

LNG prices (index)

85

83

112

62

50

156

145

105

105

105

105

Crude prices (Brent; index)

69

85

112

101

66

105

104

99

96

93

92

Consumer prices (avg)

1.3

2.0

1.9

1.6

0.9

2.6

2.3

2.2

2.4

2.4

2.4

Core consumer prices (avg)

1.7

1.6

1.6

1.6

1.2

2.7

2.1

2.2

2.4

2.4

2.4

GDP deflator (avg)

1.0

3.6

2.2

3.4

0.7

5.0

1.1

2.0

2.1

2.2

2.2

FINANCIAL

Reserve Bank of Australia cash rate (percent, avg)

1.7

1.5

1.5

1.2

0.3

0.1

0.1

0.5

1.0

1.7

2.5

10-year treasury bond yield (percent, avg)

2.3

2.6

2.6

1.4

0.9

1.5

1.9

2.5

2.8

3.0

3.0

Mortgage lending rate (percent, avg)

5.4

5.2

5.3

4.8

4.5

4.5

4.7

5.0

5.6

6.1

6.3

MACRO-FINANCIAL

Credit to the private sector

5.6

5.2

4.7

2.5

2.1

7.0

5.0

3.9

3.1

3.1

3.0

House price index (eop)

141

148

140

144

149

178

189

197

202

205

208

% change

7.7

5.0

-5.1

2.5

3.6

19.8

6.2

4.1

2.5

1.6

1.5

House price-to-income, capital cities (ratio)

4.7

4.7

4.4

4.3

4.2

4.9

4.9

4.9

4.8

4.6

4.5

Interest payments (percent of disposable income)

8.7

8.8

8.9

7.0

5.8

5.6

6.0

6.5

7.4

8.1

8.1

Household savings (percent of disposable income)

5.1

4.3

3.6

4.4

13.8

11.8

9.0

6.7

5.8

5.2

4.6

Household debt (percent of disposable income) 2/

179

184

186

186

180

187

188

186

181

176

171

Business credit (percent of GDP)

51.5

50.1

50.3

48.9

50.2

48.1

47.8

47.8

47.7

47.9

48.0

GENERAL GOVERNMENT (percent of GDP) 3/

Revenue

34.8

34.6

35.6

35.7

34.5

35.5

33.7

33.4

33.8

34.0

34.1

Expenditure

37.4

36.8

36.8

36.9

42.1

44.5

41.6

37.4

37.0

36.6

36.4

Net lending/borrowing

-2.6

-2.2

-1.3

-1.2

-7.6

-9.1

-8.0

-4.0

-3.2

-2.6

-2.3

Commonwealth only

-2.3

-1.7

-0.5

-0.1

-4.8

-6.6

-5.0

-3.0

-2.4

-2.1

-2.0

Operating balance

-1.4

-0.8

0.5

0.9

-5.4

-6.8

-5.5

-1.7

-1.1

-0.5

-0.2

Cyclically adjusted balance

-2.4

-2.0

-1.2

-1.1

-6.9

-8.3

-7.4

-4.1

-3.2

-2.7

-2.3

Gross debt

39.5

41.0

41.2

42.0

52.7

59.4

66.4

67.2

67.3

66.4

65.1

Net debt

23.5

22.9

23.6

24.4

32.1

34.9

42.2

44.5

45.0

44.6

43.5

Net worth

46.0

50.2

49.9

41.0

34.6

26.7

27.2

24.3

24.7

24.5

23.6

BALANCE OF PAYMENTS

Current account (percent of GDP)

-3.3

-2.6

-2.1

0.7

2.7

3.8

1.4

0.5

-0.1

-0.3

-0.5

Export volume

6.9

3.4

5.1

3.4

-10.1

-1.0

5.5

7.6

3.8

2.1

2.0

Import volume

0.1

7.9

4.0

-0.9

-13.4

6.8

8.3

9.6

4.6

2.7

2.5

Net international investment position (percent of GDP)

-57.7

-55.5

-54.2

-47.3

-49.9

-39.4

-36.1

-34.0

-32.5

-31.3

-30.4

Gross official reserves (bn A$)

74

85

76

84

56

MEMORANDUM ITEMS

Nominal GDP (bn A$)

1,702

1,807

1,900

2,002

1,969

2,141

2,253

2,357

2,469

2,589

2,716

Percent change

3.7

6.1

5.2

5.4

-1.7

8.7

5.2

4.6

4.8

4.9

4.9

Real GDP per capita (% change)

1.1

0.7

1.3

0.4

-3.3

3.4

3.8

1.7

1.3

1.3

1.4

Population (million)

24.4

24.8

25.2

25.6

25.7

25.7

25.8

26.1

26.4

26.8

27.1

Nominal effective exchange rate

90.9

93.6

90.0

86.3

86.0

Real effective exchange rate

90.9

93.7

89.9

86.0

85.4

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

1/ Includes changes in inventories.

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.

3/ Fiscal year ending June.


[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:https://www.IMF.org/external/np/sec/misc/qualifiers.htm.

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