The International Monetary Fund (IMF) has concluded its 2015 Article IV Consultation with Australia, concluding that while Australia’s last two decades were exceptionally strong, the economy is facing a ‘transition’ after the mining boom.
The IMF holds discussions with its country members each year, and a staff member makes the trip down under to collect economic and financial information from Australian officials regarding economic policy and developments. The staff member then returns home and prepares the report, and the results are discussed by the Board, who then compiles this final report.
What follows is an overview of the report’s findings.
The report was rather complimentary about the way Australia does business at the top end of town, however that won’t save the Australian dollar, which has seen a huge drop recently. Growth has been slow, with less public and private investment, with slowed growth in domestic markets.
- Iron ore prices fell by over a third, the report states, combined with a drop in commodities prices by one quarter
- The exchange rate is poor, blamed largely on financial developments in China
- Housing investments are up
- Consumer confidence and expectations are average to low
- Public debt is rising (from a low level)
- Wage growth is weak
- Export prices are lowering
- National fiscal deficit is sitting at a steady three per cent for the 2014/15 financial year
- Budget predicts a surplus for 2019/20 financial year
What the Board thought of Australia’s economy
The executive Board commended Australia’s ‘sound policies’ and historical good performance, due primarily to our exchange rate regime, structural reforms, and the mining boom, with worldwide demand for resources healthy.
The decline in mining investments are to result in microeconomic ‘challenges’, with growth predicted to be slow. The directors were in agreement that efforts to support demand and increase productivity would be key to a healthy transition to higher growth.
Policy-makers seem to be doing something right, with many directors’ agreeing that authorities’ plans for adjustments were a good balance that is supportive of the near-future, while addressing the longer-term financial commitments of the government.
However, the Board also said that consolidation could be ‘somewhat less frontloaded’, and adding to public investment would keep demand up, take pressure of the public purse, and create a sort of insurance against potential risks. The government has high-quality projects in the pipeline for this purpose. The Board noted that more efficient taxes could be put in place.
The Financial System Inquiry recommendations were supported by the Board, with higher capital required from banks to protect from severe scenarios. Risks in the housing sector is being targeted by authorities here, but if investor lending and home price inflation – up to 10 per cent – don't slow down, policies may need to be upregulated.
- Australia outperformed its peers for the past 20 years – GDP has grown twice as fast as others, without (technical) recession for 25 years.
- Per capita income has increased quickly, at US$61,000 in 2014, which is one of the highest globally.
- Net debt is only 15 per cent of GDP compared to 79 per cent on average for G20 advanced economies.
- Global demand for resources and migration have been very supportive of growth, with strong growth in China helping Australia along in terms of trade and resources investments.
- The resources sector expanded to around 10 per cent of GDP, accounting for almost half of GDP growth in the previous three years.
- Migration has contributed to a growing population – 1.5 per cent per year, which is one of the highest figures in the OECD.
- Strong performance is also due to good policy: credible monetary policy, strong institutions, sound financial sector supervision, prudent and transparent fiscal frameworks all contribute to a strong business environment.
The largest swing in terms of trade for 150 years
An expected increase in resources is combined with an expected fall in prices – slow growth in China is cited as the cause. Export volumes have increased, but resources prices have fallen due to pricing competition, particularly for iron ore. Most mining companies have global shareholdings, so the impact on profits has been shared.
Jobs and incomes have then taken a bit of a beating with falling incomes and unemployment rising. Disposable income per capita has been flat or falling for the past four quarters, and unemployment is at a decade-high of six per cent, which is above our peers, including the United States. Investment and consumer confidence are average.
Public debt is rising, but from a low level, with cuts to family benefits part of this problem. Consolidation is becoming more difficult for consumers.
Housing investor lending is healthy, particularly in Sydney, with APRA advising banks in 2014 that it would be focusing on high-risk mortgage lending. This has led to a tightening of the reins and a slowing of growth. Banks have reduced discounts on investor lending, reduced high loan-to-value ratio loans, and slowed interest-only lending. Capital adequacy requirements for large banks is to be increased.
Growth is expected to pick up during 2016.