Australia: 2019 Article IV Consultation—Press Release; Staff Report; and Statement by the Executive Director for Australia

International Monetary Fund. Asia and Pacific Dept

doi:10.5089/9781513536088.002.A001

Author: International Monetary Fund. Asia and Pacific Dept

Publication Date:: 05 Mar 2020

eISBN:: 9781513536088

Language:: English

Keywords:: ISCR; CR; authority; monetary policy; fiscal policy; CPI expenditure weight; housing supply reform; ABS implementation; house price inflation; infrastructure Australia; liability positions vis-à-vis nonresident; Housing prices; Housing; Private investment; Inflation; Mortgages; Global; mortgage rate; terms of trade; Phillips curve; price indicator; supply reform

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2019 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for Australia

Abstract

2019 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for Australia

Context

1. Australia is still recovering from commodity and asset price cycles in the 2010s. Macroeconomic adjustment following the 2012–14 mining boom has been prolonged, with mining investment falling through mid-2019. House prices rose rapidly from 2012 to mid-2017 and declined through mid-2019. The economy remained resilient during this period, supported by sound macroeconomic management anchored on inflation targeting, prudent fiscal policy, and exchange rate flexibility. Nevertheless, growth remains below potential and inflation has undershot the target range.

2. While macroeconomic fundamentals are strong, some structural vulnerabilities remain. Supported by high population and employment growth, the economy has avoided recessions since 1991. Nonetheless, labor productivity growth has slowed down in the wake of weakening business investment and R&D spending. The banking sector is adequately capitalized and sound but in part dependent on wholesale funding and highly exposed to residential mortgage lending. The 2012–17 housing boom resulted in household debt as high as 185 percent of disposable income. Australia has yet to develop a national, integrated approach to climate change mitigation.

3. Australia faces headwinds from subdued global economic conditions. While it has largely avoided global trade disruptions originating from the U.S.-China tensions, subdued global growth prospects and deteriorating business confidence pose a challenge for Australia’s recovery, especially given its high exposure to China.

A Fragile Recovery, Subject to Downside Risks

A. Recent Developments

4. Growth has recovered gradually but remained below trend in 2019, while inflation dipped below the Reserve Bank of Australia (RBA)’s target range.

Demand. GDP growth recovered to 2.1 percent (q/q, saar) on average in 2019Q1-Q3 from the lows in the second half of 2018. This was supported by strong public demand, reflecting a pickup in infrastructure spending and the rollout of the National Disability Insurance Scheme (NDIS). Net exports also contributed substantially (¶5). However, domestic private demand has remained weak, with negative wealth effects from the housing market downturn through mid-2019 likely weighing on private consumption. While mining investment started bottoming out after a long period of adjustment, it failed to offset a contraction in residential investment since late 2018 and weakening non-mining business investment. The ongoing drought and unprecedented bushfires are negatively affecting economic activity, while effects on growth have been limited so far (Box 1).
Labor markets. The unemployment rate has declined to 5.1 percent in December 2019, still exceeding the NAIRU estimated at 4.8 percent. The underemployment rate remained high, suggesting persistent labor market slack. Wage growth remained slow at 2.2 percent (y/y) in 2019Q3 in light of persistent underemployment, sluggish labor productivity growth, and prolonged adjustment after the mining investment boom (Box 2). Employment continued to grow strongly at 2.3 percent (y/y) in 2019 owing to rising female and older-adult labor force participation, but job vacancies and advertisements started to ease, indicating cooling momentum in labor demand.
Prices. Headline and underlying inflation dropped to around 1¾ percent (y/y) in 2019Q2-Q4, below the RBA’s target range of 2–3 percent. This was driven by subdued price increases in housing-related items (rents and new dwellings) and utilities, which more than offset a small pickup in tradable inflation due to exchange rate depreciation. Prices for fresh food items rose in 2019Q4, likely reflecting the impact of the drought on supply.

5. The external position is broadly in line with fundamentals and desired policies. The current account (CA) has improved since mid-2018 and is expected to have recorded a surplus of 0.4 percent of GDP in 2019. This reflects a temporary surge in iron ore prices, depreciation of the Australian dollar driven by higher U.S. interest rates, continued strong growth in LNG exports, and a contraction in imports reflecting weak domestic demand. The preliminary CA gap for 2019 is estimated at 0.3 percent of GDP, suggesting that the external position remains broadly in line with fundamentals (Annex I). The CA balance is projected to post a deficit of 0.4 percent of GDP in 2020, as the terms-of-trade surge unwinds.

6. Housing markets have begun to tighten again. Nationwide housing prices in December 2019 posted an increase of about 8 percent from their trough in June 2019 but remained about 4 percent below their peak in September 2017. The rise in housing demand and prices was supported by the resolution of uncertainty regarding tax incentives,¹ the Australian Prudential Regulation Authority (APRA)’s recalibration of the safety margin for banks’ serviceability assessments which softens borrowing constraints,² and interest rate cuts (¶9). However, home sales in December were still about 19 percent below their 2017 average and housing credit growth continued to slow to 3.1 percent (y/y) in December. On the supply side, past declines in residential housing approvals suggest a continuing decline in residential construction, which, in the context of normalizing demand, could indicate upside risks to prices (Figure 3).

7. Australian banks are adequately capitalized and profitable, though dependence on wholesale funding remains a vulnerability. Major banks’ common equity Tier 1 capital ratio averaged 11 percent in September 2019, above the 10.5 percent “unquestionably strong” threshold required by January 1, 2020. That said, bank’s earnings have declined amid slower credit growth and increased remediation and compliance costs. The non-performing loan ratio has crept up due to higher housing loans in arrears but remained low at 1 percent in September 2019. Banks’ reliance on offshore wholesale funding, albeit declining, remains high, accounting for about 20 percent of banks’ total funding (Figures 6–7).

8. The fiscal outturn for FY2018/19 was tighter than expected while budgets for FY2019/20 are more expansionary.³ In FY2018/19, revenues were stronger than forecast, led by positive terms-of-trade effects on corporate profits and stronger payroll taxes for the states.⁴ Expenditures were roughly in line with FY2018/19 expectations although infrastructure investment was weaker than expected because of capacity constraints in the construction industry. FY2019/20 Commonwealth and state budgets imply a fiscal impulse of 0.2 percent of GDP, driven by higher infrastructure investment and personal income tax (PIT) reductions, while the combined overall deficit remains contained at 1 percent of GDP.

9. Monetary policy has eased since mid-2019. The RBA cut the policy rate from 1.5 percent to 0.75 percent in increments in June, July, and October 2019, because of weaker-than-expected inflation and wage outcomes. It has indicated an accommodative bias, highlighting the need for an extended period of low interest rates to reach full employment and the inflation target range. Domestic financial market conditions have loosened, with the policy rate cuts largely having passed through to banks’ funding, deposit, and mortgage lending rates, with long-term treasury bond yields declining to historic lows. Despite the monetary easing, business credit growth has remained subdued, reflecting the impact of policy uncertainty on business investment (Annex II) along with monetary policy lags.

B. Outlook

10. Growth should continue to recover gradually, but it will take time for the economy to return to potential and restore inflation to within the target range.

Growth is projected to recover from 1.8 percent in 2019 to 2 percent in 2020. Private domestic demand is expected to recover slowly, supported by monetary policy easing and the PIT cuts. In addition, the house price recovery will likely reduce the drag on consumption from earlier negative wealth effects. An incipient recovery in mining investment is also expected to contribute to growth. However, residential investment continues to be a drag on growth, and non-mining business investment is expected to take longer to recover, given continued global policy uncertainty.⁵ Net exports will contribute less to growth, given the completion of mining export ramp-ups, weakening demand from China, continued global policy uncertainty, the impact of the drought and bushfires on agriculture exports, and the (so far estimated to be limited) effects of the recent coronavirus outbreak. Over the medium term, growth is forecast to reach staff’s estimate of potential growth of about 2½ percent, which incorporates a small pickup in total factor productivity growth due to progress in infrastructure development and structural reforms (see below).
Inflation is forecast to stay below the target range until 2021, with a negative output gap (projected at -1.0 percent of GDP for 2020) and labor market slack expected to unwind only gradually.
Housing prices are expected to stabilize in real terms. Underlying demand for housing should remain strong because of robust population growth, the easing of financial conditions, and a small improvement in housing affordability. Household debt should stabilize at around 185 percent of disposable income in 2019 and decline gradually in the coming years because of moderate increases in disposable income.

C. Risks

11. Risks to the outlook remain tilted to the downside (Annex III).

On the external side, Australia is especially exposed to a deeper-than-expected downturn in China through exports of commodities and services (Annex IV). Spillovers from a renewed escalation of the China-U.S. tensions would depend on the reaction of commodity prices and China’s policy response, especially on public investment, which is linked to China’s imports of iron ore and coal.⁶ An escalation could also worsen global business sentiment, discouraging investment in Australia. The Phase I trade deal between the United States and China, while helping to de-escalate global trade tensions, could imply downside risks for Australia’s exports to China through trade diversion depending on how the managed trade component of the deal will be executed. More prolonged travel disruptions related to the coronavirus outbreak could lead to a stronger drag on tourism exports, while a pronounced decline in Chinese demand as result of the outbreak could affect Australian merchandise exports. A sharp tightening of global financial conditions could squeeze banks’ wholesale funding, raising borrowing costs in the economy.
On the domestic side, private consumption could weaken if a cooling of labor markets squeezed household income. Adverse weather conditions, including a worsening of the bushfires, could affect consumption and tourism in affected urban areas and rural agriculture. Looser financial conditions could re-accelerate asset-price inflation (including in housing; Box 3), boosting private consumption but also adding to medium-term vulnerabilities given high household debt levels.

D. Authorities’ Views on Outlook and Risks

12. The authorities expected growth to continue to recover in the near term. As of early December, they projected growth to reach 2¼ percent in FY2019/20 and 2¾ percent in FY2020/21—higher than staff’s projection. Household consumption was expected to pick up gradually in coming quarters, supported by the personal income tax relief, continued strong employment growth, recent monetary policy easing, and the recovery in the established housing market. Business investment was expected to contribute significantly to growth, reflecting strong corporate sector balance sheets and a pickup in mining investment to sustain, and in some cases expand, production levels. It was also expected that public demand would continue to support growth, reflecting the government’s efforts to boost spending on education, healthcare, and infrastructure, along with the roll-out of the NDIS. With labor market slack gradually diminishing, headline and underlying inflation were expected to increase gradually toward the target range.

13. Risks to the outlook were seen as balanced, especially beyond the near term. In the near term, escalation or de-escalation of the U.S.-China trade and technology tensions remained a large uncertainty for global growth, which, if realized, could spill over to Australia. China’s slowing growth trajectory and the interaction of Chinese domestic policies and external pressures also continued to pose risks to the demand for bulk commodities and Australia’s terms of trade. The authorities also remained vigilant against the uncertain downside risks posed by the drought and the unprecedented bushfires, which were still unfolding, and by the recent coronavirus outbreak. More broadly, private consumption could continue to be weak should consumers opt to save gains in disposable income from high employment growth, personal income tax cuts, and lower mortgage costs. The expected turnaround in residential investment in late 2020 could be delayed due to longer-than-expected lead times for high-density dwelling construction. A rapid recovery in the housing market constituted a key upside risk, which could boost private consumption and residential investment beyond the near term but could also add to medium-term macrofinancial risks.

Supporting the Recovery with Accomodative Macroeconomic Policies

Context

14. The consolidated fiscal stance is expansionary for FY2019/20 but expected to be contractionary in FY2020/21. Fiscal policy at the Commonwealth level will be supportive of demand in the near term via legislated PIT and CIT cuts and additional infrastructure spending (consistent with the Commonwealth government’s commitment of raising its 10-year cumulative infrastructure spending from A$75 billion to A$100 billion), while laying out a clear consolidation path to achieve the medium-term fiscal goal (achieve budget surpluses over the cycle).⁷ However, state-level fiscal policy is expected to be contractionary from FY2020/21, as infrastructure investment as a share of GDP is expected to decline.

15. Monetary policy has been accommodative amid declining inflation expectations. Following the recent rate cuts, the real policy rate stands at almost -1 percent relative to estimates of the real neutral rate in the range of 1 to 2 percent. Market-based inflation expectations have dipped below 2 percent for the first time since 2016.

Staff’s Views

16. The policy mix should remain accommodative. Below-potential growth, weakening inflation expectations, and continued global downside risks present an environment in which continued support from accommodative fiscal and monetary policies will be needed. In addition, the authorities should be ready to respond in case downside risks materialize, including through (i) additional fiscal policy stimulus to avoid over-burdening monetary policy; (ii) further monetary easing, likely including unconventional monetary policy (UMP) measures as the cash rate is close to the effective lower bound (ELB); and (iii) targeted macroprudential measures to arrest the buildup of any pockets of vulnerability from loose financial conditions in the context of UMP.

17. While the consolidated fiscal stance is appropriate for FY2019/20, the contractionary stance in FY2020/21 should be reconsidered. With sluggish private domestic demand, the planned, moderate fiscal expansion in FY2019/20 is appropriate. Spending should be flexible to accommodate any additional costs for response and recovery from the bushfires.⁸ That said, the contractionary stance envisaged for FY2020/21 at the consolidated level should be reconsidered as it could put the incipient economic recovery at risk in an environment of still below-potential growth and continued labor market slack. The expected contraction is driven by a decline in state-level infrastructure investment as a share of GDP—a decline which continues in future years in most states. States should attempt to at least maintain their current level of infrastructure spending as a share of GDP.

18. Monetary policy should remain accommodative for the foreseeable future. The 75 basis point policy rate cuts during 2019 were appropriate in supporting domestic demand and inflation. That said, if incoming high-frequency data continue to lend support to the staff baseline scenario of below-potential growth and weakening inflation expectations in an environment of elevated downside risks, additional policy easing will be appropriate.

19. Both Commonwealth and state governments have substantial fiscal space and should be prepared to provide additional stimulus in case downside risks materialize. In this case, they should be prepared to enact temporary measures, including by further buttressing their infrastructure pipelines to step up such investment further. Plans should internalize capacity constraints in the construction industry. In addition, the Commonwealth government could also consider measures such as tax breaks for SMEs, bonuses for retraining and education, or cash transfers to households. In case stimulus is necessary, the implementation of the budget repair (deliver a budget surplus of at least 1 percent of GDP as soon as possible) should be delayed, as permitted under the Commonwealth’s medium-term fiscal strategy.

20. UMP could become necessary in case of downside risks. With the cash rate already close to the effective lower bound, UMP may be needed if downside risks materialize. In that case, UMP should focus on measures that affect the short end of the yield curve since Australia’s prevalent debt instruments—mortgages and corporate lending—are anchored to variable short-term interest rates. Along with stronger forward guidance that could employ calendar- and/or outcome-based guidance on future policy actions, the main policy options would include quantitative easing through purchases of government debt securities, mildly negative policy rates, and targeted conditional lending operations to banks.

Authorities’ Views

21. The Commonwealth government indicated that it would continue to pursue its planned near-term fiscal consolidation provided that its baseline growth forecasts came to pass. Given the expectation of growth returning to potential, the Commonwealth government did not see a case for near-term fiscal stimulus. The Commonwealth expected to deliver a surplus in its underlying cash balance, although it would not be at the expense of funding the recovery from the ongoing bushfires. States planned to continue consolidating their fiscal positions where possible as well.

22. Infrastructure spending was expected to remain strong. Both levels of government were concerned about risks of capacity constraints slowing the pace and increasing the cost of the ongoing infrastructure push. The authorities stressed that they were increasingly coordinating across Commonwealth, state and local levels for the most efficient outcomes, and were using public-private partnerships.

23. The RBA was prepared to provide more monetary stimulus if needed. It stressed that the impact on aggregate demand and inflation from last year’s rate cuts had not yet fully materialized in light of the long and variable lags of monetary policy. In addition, the remaining space for conventional policy would likely provide sufficient scope for policy support as needed, with inflation expected to return to the target range by late 2021.

24. The authorities agreed that a severe negative shock might require a combined fiscal and monetary policy response. While a Commonwealth fiscal cash surplus was a priority, the authorities indicated that this could be reconsidered in a downside scenario that significantly changed baseline assumptions. They also noted that in such a downside scenario, UMP may be required as the RBA’s cash rate is already close to the lower bound. The precise nature of the policy response would depend on the nature of the shock, although negative interest rates would be a very unlikely choice, as they were generally not seen as effective in Australia’s context.

Enhancing Financial Sector Resilience

Context

25. Macroprudential policy, working in tandem with stricter enforcement of prudential regulations, has been effective in reducing riskier mortgage loans. The tightening of macroprudential policies over 2014–17 helped address high-risk mortgage lending (Annex VI). While regulations were subsequently eased during the housing market downturn, the loan structure has not deteriorated again, with the outstanding share of investor loans at 32 percent and that of interest-only loans at 20 percent, well below their peaks of close to 40 percent in around 2015. Loans with loan-to-value ratios (LVRs) above 80 percent have also stabilized at 23 percent in September 2019.

26. The capital framework for banks has been further strengthened. APRA announced in July 2019 the requirement for domestic systemically-important banks (D-SIBs) to strengthen their total loss-absorbing capacity (TLAC) by lifting their total capital by 3 percentage points of risk-weighted assets by January 1, 2024. With this, the four major banks will be expected to maintain a total capital ratio of around 17½ percent. Increasing the TLAC will bolster the amount of private funds available to facilitate orderly resolution in the event of a bank failure and minimize taxpayer support. APRA has also proposed revisions to banks’ capital framework which would ensure that capital held against assets is more sensitive to their riskiness and aims at reducing the concentration of residential mortgages on banks’ balance sheets. It also indicated the likelihood of setting a countercyclical capital buffer (CCyB) at non-zero default level.

Staff’s Views

27. Australian banks remain adequately capitalized and profitable, but vulnerable to high household debt, exposed to residential mortgage lending, and dependent on wholesale funding. While the risk structure of mortgage loans has significantly improved, financial vulnerabilities from high household debt remain a concern. A renewed overheating of housing markets and a fast pick-up in mortgage lending constitute increasing risks in a low-interest-rate environment. Staff supports the authorities’ plan to further enhance banks’ capital framework to strengthen their loss-absorbing capacity and resilience. In addition, notwithstanding some progress in reducing wholesale funding dependency, encouraging banks to further lengthen the maturity structure of their wholesale funding would help mitigate structural liquidity risks.

28. The macroprudential policy stance remains appropriate but should stand ready to tighten in case of increasing financial risks. The authorities should ensure that the easing of macroprudential thresholds on investors and interest-only loans and the recalibration of mortgage serviceability assessments will not lead to a renewed increase in high-risk residential mortgage lending as the housing market recovers. APRA should continue to expand and improve the readiness of the macroprudential toolkit to allow for more flexible and targeted responses to persistent and new systemic risks. This should include preparations, for potential use in the event of a rapid housing credit upswing, for introducing LVR and debt-to-income (DTI) limits, and possibly a sectoral CCyB targeting housing exposures. Staff concurs with the recommendation of the APRA Capability Review to further strengthen transparency and public communication on macroprudential policy.⁹

29. Strong reform efforts to bolster the resilience of the financial sector should continue. The authorities’ commitment to implement the recommendations made by the Hayne Royal Commission (HRC) by end-2020 is welcome.¹⁰ The comprehensive package of reforms aims to expand protection for consumers, enhance governance and accountability of financial institutions, and further strengthen the effectiveness of regulators to ensure trust in the financial system. Regulators have received more resources in the FY2019/20 budget, and legislation required to implement the HRC’s recommendations is being prepared. The improvement in lending standards would further enhance financial sector resilience. At the same time, reducing the uncertainty in the enforcement of responsible lending obligations would prevent excessive risk aversion in the provision of credit. The authorities should implement the APRA Capability Review’s recommendations to strengthen APRA’s resources and operational flexibility. Staff welcomes APRA’s commitment to strengthening and intensifying its regulatory approach to overseeing governance, culture, remuneration and accountability.

30. Building on the progress so far, continued implementation of the recommendations of the 2018 Financial Sector Assessment Program (FSAP) should remain a priority. Ongoing progress in implementing the 2018 FSAP recommendations is welcome (Annex VII). Strengthening systemic risk oversight of the financial sector and reinforcing financial crisis management arrangements should remain priorities. The authorities should complete the resolution policy framework, expedite the development of bank-specific resolution plans, and introduce statutory powers for bail-in.

31. Recent developments have underscored the need for strengthening the anti-money laundering and counter-terrorist financing (AML/CFT) frameworks. Recent high-profile money laundering cases have pointed to weaknesses in the AML/CFT regime. In line with the 2018 FSAP recommendations, the authorities should strengthen AML/CFT supervision by improving data collection and risk analysis, increasing oversight of control and compliance, and undertaking more formal enforcement action in the event of a breach. In addition, the coverage of the AML/CFT regime should expand swiftly to include all non-financial and business professionals, starting with those identified to present higher ML/FT risks. This would include real estate agents, lawyers, and trust and company service providers.

Authorities’ Views

32. The authorities agreed that, while macroprudential policy was currently adequate, vigilance was required in light of a possible renewed housing surge. They pointed to their strong focus on buttressing systemically important banks’ loss-absorbing capacity and their ongoing work to strengthen banks’ capital framework more broadly. While they noted that banks extending the maturity of their foreign wholesale funding could reduce roll-over risks in the banking system, this needed to be balanced against difficulties in hedging the ensuing exchange rate risk for long maturities.

33. The authorities highlighted the progress achieved in implementing the 2018 FSAP key recommendations. Banking and insurance supervision is being strengthened through the introduction of enforcement and penalty powers for the Australian Securities and Investments Commission (ASIC); new enforcement, governance, and risk management approaches for APRA; and adopting a supervisory model incorporating stress testing. In the area of systemic risk oversight and macroprudential policy, there has been progress in improving the transparency of the Council of Financial Regulators (CFR). Ongoing efforts to improve data capability were expected to facilitate financial stability analysis, including stress testing. On financial crisis management and safety nets, work continued on recovery and resolution planning through the CFR and with the New Zealand counterparts. On AML/CFT, a bill currently in Parliament was expected to strengthen the regime and address barriers to prosecution, through increased funding for the Australian Transaction Reports and Analysis Centre (AUSTRAC) to expand risk assessment.

Navigating the Swift Recovery in Housing Markets

Context

34. The fast increase in housing prices since mid-2019 has partly undone earlier price declines. As such, despite lower mortgage rates, there has only been a limited improvement in housing affordability for many households since the peak in housing prices in 2017 (Box 4).

Staff’s Views

35. Housing supply reforms are critical for restoring affordability. More efficient long-term planning, zoning, and local government reforms that promote housing supply growth, along with a focus on infrastructure development, remain critical to meet the needs of a growing urban population. Initiatives such as “City and Regional Deals” that aim to integrate transport, housing and land use polices to create the opportunity for coordinated action to maximize the value of infrastructure investment, should help meet growing demand for housing.

36. Broader tax reforms could reinforce the effectiveness of supply-side measures. Transitioning from a housing transfer stamp duty to a general land tax would improve efficiency by easing entry into the housing market and promoting labor mobility, while providing a more stable revenue source for the states. Such reforms could be complemented by reducing structural incentives for leveraged investment by households, including limiting negative gearing in residential real estate. Nonetheless, major changes affecting investment decisions and underlying demand for housing should be gradual, and such reforms should not be undertaken in isolation. In addition, housing policy measures discriminating against non-residential buyers, such as state-level foreign purchaser duty surcharges on residential property, should be replaced by alternative, non-discriminatory measures, such as a general surcharge on vacant property or surcharges on all investor-owned housing transactions.¹¹^,¹²

Authorities’ Views

37. The authorities saw potential risks linked to a possible reemergence of rapid housing price growth. With population growth projected to remain strong, the ongoing weakness in building approvals following the past decline in housing prices and tighter credit supply for developers could result in a shortage of new housing and renewed rapid housing price growth, with the risk that this would, in turn, lead to stronger growth in household debt.

38. The authorities stressed that they would continue to facilitate housing supply reforms and other measures to improve housing affordability. They highlighted that the Commonwealth government provides annual housing-related funding such as rental subsidy for individuals through the Commonwealth Rent Assistance (CRA), funding to states and territories to improve Australians’ access to affordable housing through the National Housing and Homelessness Agreement (NHHA), and the First Home Loan Deposit Scheme to provide loan guarantee to lenders for first-time home buyers. Housing has also been a priority in the City and Regional Deals. The authorities thought that tax policy was not the right tool to address potential speculative behavior in housing markets, as negative gearing applies across investments and investments in residential housing are relatively highly taxed, and that macroprudential policy should instead be employed as needed.

Fostering Strong, Inclusive and Sustainable Growth

Context

39. Australia has been facing longstanding obstacles to growth. A strong and flexible skill base and favorable product-market indicators point towards a competitive business environment in Australia, but Australia’s productivity growth has declined. Non-mining business investment growth has been sluggish, with investment in R&D weakening. There is also continued pressure on infrastructure from rising population in the major cities. The tax system is relatively inefficient with a comparatively large share of direct taxes. Despite significant progress, female employment has remained relatively low compared with other advanced economies and Australian women are disproportionately in part-time employment, while there is persistently high underemployment of about 20 percent for younger Australians.

40. Recent structural policy efforts have focused on implementing reforms identified by productivity reviews and sectoral inquiries. Public spending on infrastructure has jumped over the last three years and the government announced a 10-year plan for infrastructure spending in the government’s 2019–20 budget. The Commonwealth government enacted PIT cuts and lowered CIT rates for SMEs. A Deregulation Taskforce has been established to remove impediments to investment and job creation in targeted areas. The government launched a Child Care Subsidy program and announced a Mid-Career Checkpoint initiative to support the return to the workforce from caring responsibilities. It has been investing to modernize vocational education and training and launched a targeted initiative to support youth employment. The government is also reforming the R&D tax credit regime focusing on reducing abuses by larger, older firms, and taken initiatives for SME funding.

41. Important challenges remain in energy and climate change policies. While the Commonwealth’s energy reform, aimed at reducing prices and improving reliability of electricity supply, has made some progress in replacing coal with natural gas and renewables in electricity generation, Australia remains among the top ten largest greenhouse gas emitters in the OECD. The Commonwealth’s Climate Solutions Package, announced in February 2019, aims at meeting Australia’s Paris Agreement emissions target for 2030 through financial support to mitigation efforts by businesses, communities, and landholders; and greater use of renewables, including a renewable energy target and plans to significantly improve Australia’s energy productivity. However, plans do not rely on price-based measures such as a carbon tax or an emissions trading scheme. State governments have separate energy and emissions strategies that are not sufficiently integrated with the Commonwealth’s approaches. The authorities project that Australia will meet its 2030 emissions reduction target on current policies, relying on a carryover from past overperformance that is applied toward the 2030 target.¹³

Staff’s Views

42. Building on past reforms, further efforts are needed to foster strong, inclusive and sustainable growth. The government should continue to address infrastructure gaps, strengthen the investment environment and innovation capacity, and make the tax system more efficient. Promoting female labor force participation and reducing youth underemployment would also boost potential growth.

43. Accelerating structural reforms would help to improve the investment environment. Building on reforms in the 2015 Harper Review, Australia can further improve product market regulations, including by simplifying business processes through broadening the work of the Deregulation Taskforce.¹⁴ The ongoing policy priority on skills and education reforms is welcome to improve the environment for innovation, and consideration should be given to faster implementation of the recommended measures in the Australia 2030: Prosperity through Innovation report. Government initiatives to relieve SME financing constraints are welcome, including the Australian Business Securitization Fund and the Australian Business Growth Fund. Incentives for banks to lend more to businesses, including through reducing the concentration in mortgages, can help support business investment, as can the promotion of venture capital. Supporting new investment through tax measures, possibly including targeted investment allowances, as well as further improving the effectiveness of government R&D support for younger firms, would also be helpful.

44. Progress in boosting infrastructure spending is welcome. A welcome increase in public spending in transport and social infrastructure has reduced Australia’s infrastructure gap. The ratio of infrastructure investment spending to GDP should be maintained at the current level into the medium term, at a minimum (¶17). Bottlenecks in the construction industry could be addressed through increased Commonwealth-state-local coordination and prioritization as under the City and Regional Deals, or skilled laborer visas to alleviate skills shortages.

45. Further labor market reforms would help to promote female labor market participation and reduce youth underemployment. There is scope to increase full-time employment for Australian women and addressing persistently high underemployment particularly among youth. The Child Care Subsidy and Mid-Career Checkpoint programs are expected to support women in work. This could lay the foundation for a broader review of the combination of taxes, transfers, and childcare support to reduce disincentives for female labor force participation. Pursuing ongoing reforms in vocational education and training can help reduce youth underemployment.

46. Broad fiscal reforms could help promote efficiency and inclusiveness. While the Commonwealth government enacted PIT cuts and lowered CIT rates for SMEs, the share of direct taxes in Australia’s tax revenue remains high compared with peers. Australia should continue to work towards shifting from direct to indirect taxes by: (i) broadening the GST base to make the tax system more efficient and (ii) reducing the statutory CIT rate for large firms. Given the potential, adverse distributional consequences of these reforms, there should be emphasis on making their impact less regressive, including by strengthening targeted cash transfers. Tax incentives targeting new investment and innovation could be strengthened (¶43).

47. Uncertainty around Australia’s climate change mitigation policies may impact investment decisions and sustainable growth. The public debate around Australia’s level of ambition in climate change mitigation policies (applying the carryover from past overperformance to the Paris emissions target implies that emissions in 2030 are envisaged to be 4 percent below current levels) has reinforced a sense of policy uncertainty in the energy sector, which is holding back business investment. Developing and implementing an ambitious, national, integrated approach to climate change policy, including long-term goals and strategies, and clarifying how existing and new instruments can be employed to meet the Paris Agreement goals, would help reduce policy uncertainty and catalyze environmentally friendly investment in the energy sector and the broader economy. Price-based measures are generally seen as more cost-effective in reducing emissions than administrative measures, as they provide a robust price signal for mobilizing low-emissions investment. If carbon taxes or similar approaches are not possible in light of political economy considerations, other approaches such as a “feebate system” in power generation, effectively a sliding scale of fees and rebates depending on the intensity of emissions, could be explored.

48. Australia’s continued efforts supporting cooperation in international trade and investment are welcome. Staff welcomes the authorities’ support to enhance the effectiveness of the WTO and pursuit of the Regional Comprehensive Economic Partnership (RCEP), which aims to liberalize trade, improve quality and environmental standards, and foster labor mobility throughout much of Asia and the Pacific.¹⁵

Authorities’ Views

49. The authorities stressed their continued reform efforts focusing on improving the business environment and competition. They saw the Deregulation Taskforce as an important initial step toward simplifying business regulation in support of investment and job creation, which could be broadened over time. They pointed to the Digital Platforms Inquiry which investigated digital competition and the sustainability of news media following the ascendance of global digital platforms. They highlighted the significant progress made in addressing infrastructure gaps by stepping up public investment spending but cautioned that bottlenecks in project execution, including from long-term planning and zoning and capacity constraints in the construction industry, constituted important challenges. The authorities also reiterated their strong commitment to international cooperation through the WTO and FTAs.

50. The authorities agreed with the merits of tax reform but noted that there was currently not a strong community acceptance of this. They agreed that reduced reliance on direct taxes and increased reliance on indirect taxes would be desirable. They noted, however, that any change to the GST required the support of all states and territories and that consideration of distributional objectives would need to be part of this. The authorities agreed with the need to incentivize business investment, including in intangibles, but pointed out that legislation to lower the corporate tax rate for all firms had failed to pass in parliament. While recent public attention had turned to investment incentives, any incentive would need to be carefully designed to achieve its stated objective. More broadly, the authorities highlighted that a strong medium-term fiscal strategy was an important foundation underpinning credibility and confidence for business investment.

51. Supporting female labor force participation and youth employment remain policy priorities. The authorities stressed Australia’s progress in promoting female labor force participation in recent years, with female participation currently around historic highs, and highlighted that important initiatives, such as the Child Care Subsidy and Mid-Career Checkpoint initiatives, the Parents Next program, and the Jobs and Market Fund would be helpful in making further inroads. The government is also modernizing the vocational education and training sector to equip young people with the skills needed to move into stable employment.

52. The authorities’ energy reform focuses on reducing energy prices and ensuring reliable supply. Government actions aim to deliver reliable, sustainable and affordable electricity to households and businesses. The government is also focused on securing domestic gas supply and decreasing gas prices. It stressed its commitment in the area of climate mitigation, projecting that Australia is on track to exceed its 2020 emissions reduction commitments and would achieve its 2030 emissions reduction target. It acknowledged that policy certainty is important for investment in the energy sector and noted that measures are under development to support new investments in the sector.

Staff Appraisal

53. Australia’s economy is in a nascent but still fragile recovery. The economy has remained resilient through commodity and asset price cycles over the last decade supported by sound macroeconomic management, but growth has remained below potential recently amid global headwinds, with inflation and wage growth subdued. With an improving current account supported by strong exports, the external position for 2019 was broadly in line with the level implied by medium-term fundamentals and desirable policies. Looking ahead, growth is expected to recover gradually, supported by monetary policy easing, tax cuts, an incipient pickup in mining investment, and the bottoming-out of housing markets. However, underlying inflation will likely stay below the target range until 2021 amid continued macroeconomic slack. Downside risks to the outlook remain elevated and have increased recently due to the widespread bushfires and the coronavirus outbreak.

54. The near-term macroeconomic policy mix should thus remain accommodative. Monetary policy has been appropriately accommodative, and continued, data-dependent easing will be helpful to support the recovery of domestic demand and inflation expectations. Fiscal policy is appropriately expansionary for FY2019/20, supporting demand via reductions in personal income and small-business corporate taxes and additional infrastructure spending. However, an expected contractionary fiscal stance at the consolidated level in FY2020/21 should be avoided, as states should attempt to at least maintain their current level of infrastructure spending as a share of GDP to continue addressing infrastructure gaps and supporting aggregate demand.

55. Fiscal and monetary policy should be ready for a coordinated response if downside risks materialize. Australia has substantial fiscal space it can use if needed. In addition to letting automatic stabilizers operate, Commonwealth and state governments should be prepared to enact temporary measures such as buttressing infrastructure spending. In case stimulus is necessary, the implementation of budget repair should be delayed. In addition, UMP measures such as quantitative easing may become necessary in such a scenario as the cash rate is already close to the effective lower bound.

56. The macroprudential policy stance remains appropriate but should stand ready to tighten in case of increasing financial risks. While macroprudential management has been effective in improving the risk structure of mortgage loans, renewed overheating of housing markets and a fast pick-up in mortgage lending remain risks in a low-interest-rate environment. To address them, APRA should continue to improve the readiness of its macroprudential toolkit and prepare for potential use of loan-to-value and debt-to-income limits, and possibly a targeted countercyclical capital buffer.

57. Strong reform efforts to bolster the resilience of the financial sector should continue. Australian banks remain adequately capitalized and profitable, but vulnerable to high exposure to residential mortgage lending and dependent on wholesale funding. Staff supports the authorities’ plan to further enhance banks’ loss-absorbing capacity and implement the recommendations made by the Hayne Royal Commission. In addition, encouraging banks to further lengthen the maturity structure of their wholesale funding would help mitigate liquidity risks. Reform priorities also include implementing the APRA Capability Review’s recommendations, reinforcing financial crisis management arrangements as highlighted in the 2018 FSAP, and strengthening the AML/CFT regime.

58. Housing supply reforms remain critical for restoring affordability. More efficient long-term planning, zoning, and local government reform that promote housing supply growth, along with a focus on infrastructure development, including through City and Regional Deals, should help meet growing demand for housing.

59. Australia should step up structural reforms toward strong and inclusive growth. Weakening business investment could be buttressed by reducing domestic policy uncertainty, supporting SMEs’ access to finance, pursuing product market deregulation, and introducing well-targeted tax incentives. Innovation could be promoted by accelerating skills and education reforms and further improving the effectiveness of government R&D support. Reducing disincentives for female labor force participation could increase full-time female employment, and further reforms in vocational training would help reduce youth underemployment. Building on recent reforms in personal and corporate income taxes, a further shift from direct to indirect taxes would reduce distortions of the tax system and promote growth. Adverse distributional consequences of this shift should be offset, including by strengthening targeted cash transfers. Priorities for tax reforms also include transitioning from a housing transfer stamp duty to a general land tax and reducing structural fiscal incentives for leveraged investment by households, including in residential real estate.

60. Efforts to support international cooperation and tackle climate change should continue. Staff welcomes the authorities’ support to enhance the effectiveness of the WTO and pursuit of the RCEP, which would help promote economic integration in the Asia and Pacific region. Developing an ambitious, national, integrated approach to energy policy and climate change mitigation to meet the Paris Agreement goals would help reduce policy uncertainty and catalyze business investment in Australia.

61. It is recommended that the next Article IV consultation be held on the standard 12-month cycle.

^{Box 1.}

Bushfires and Their Macroeconomic Impact

Australia has been experiencing an unprecedented bushfire season since November 2019. As of January 22, 2020, 10.4 million hectares have burned in the 2019–20 bushfire season. The area is much larger than in the past episodes of severe bushfires and more than 10 times the size of the 2019 Amazon fires. So far, 29 people have been killed, nearly 2,900 homes destroyed, and A$1.3 billion (almost 0.1 percent of GDP) in insurance claims filed. The air quality in Sydney, Canberra, and Melbourne has been heavily impacted by smoke from bushfires. Fires are still spreading, and the bushfire season is expected to last through the summer in Australia.

The prolonged drought, which has contributed to the rapid spread of the bushfires, has been a drag on growth. Over 2019Q1-Q3, agriculture-related output and cereal exports dropped by 9 percent and 33 percent, respectively, from the same period last year. Staff projections envisage continued weakness in agriculture to shave off about 0.1–0.2 percentage points from annual GDP growth in 2020.

The bushfires may have an indirect impact on demand. With Australia’s economic activities concentrated in metropolitan areas, the growth impact of severe natural disasters in Australia has been relatively muted. This said, severe bushfires in the past temporarily slowed down retail sales and tourist arrivals in the major cities affected by smoke. Given the unprecedented magnitude of the ongoing bushfires and the frequent smoke events in Sydney, Canberra, and Melbourne, the impact on consumption and tourism could be larger than in past events. The authorities have estimated that the impact of the bushfires could be about 0.2 percent of GDP over 2019Q4 and 2020Q1, though with significant uncertainty. The temporary negative impact could be offset by an increase in demand from post-disaster reconstruction work in the affected regions.

The government has been providing assistance as needed. Aside from firefighting and rescue efforts, the Commonwealth and state governments have supported the victims through various natural disaster support mechanisms. In January, the Commonwealth government created the National Bushfire Recovery Agency to coordinate post-disaster assistance, making available A$2 billion (0.1 percent of GDP) over 2020 and 2021 to provide financial support for affected families, primary goods producers, small businesses, and local governments. The New South Wales state government has announced a A$1 billion package with a focus on rebuilding infrastructure. The Commonwealth disbursed in January 2020 over A$60 million to local governments for dealing with the impacts of bushfires.

^{Box 2.}

Why Has Wage Growth Been Low in Australia?

Nominal wage growth in Australia has remained subdued in recent years despite a tightening of labor market conditions. After several years of robust employment growth, the headline unemployment has fallen from about 6.3 percent in 2015 to 5.1 percent in December 2019. However, nominal wage growth has picked up only slightly. Real wage growth picked up recently as inflation declined but remains below its historical average.

The disconnect between unemployment and nominal wage growth is not unique to Australia. In many advanced economies, unemployment declined after the global financial crisis, but nominal wages grew at a distinctly slower pace. The October 2017 World Economic Outlook found that the weak wage growth in advanced economies can be attributed to labor market slack not represented by unemployment and subdued labor productivity growth.

Persistent underemployment, sluggish labor productivity growth, and prolonged adjustment to the mining investment boom are likely drivers for Australia’s low nominal wage growth. Underemployment, defined as part-time employees who want to work more hours, has remained elevated despite the recent decline in unemployment, suggesting continued labor market slack. Labor productivity growth has been on a declining trend since the end of the 2012–14 mining investment boom. The adjustment after the mining investment boom led to a sharp slowdown in wage growth in the mining sector, which was not offset by wage growth in the rest of the economy.

Australia’s low wage growth rate is explained well by an empirical model that incorporates these potential drivers. Staff estimated a wage Philips curve by augmenting a standard model containing unemployment and inflation (Galí, 2011).¹ The augmented model, which includes additional explanatory variables comprising underemployment (measured by the involuntary part-time job ratio), labor productivity, and the terms of trade, is able to track the decline in wage growth over 2012–16 and the modest pick-up in recent years.

Wage growth is likely to remain low in coming years. This is because of persistently high underemployment, a projected decline in the terms of trade, and sluggish productivity growth. The persistent labor market slack would imply weak inflation prospects and warrant an accommodative macroeconomic policy mix in the near term.

¹ Galí, J., 2011, “The Return of the Wage Phillips Curve,” Journal of the European Economic Association 9(3): 436–461.^2/ The standard wage Phillips curve incorporates unemployment (level and change) and trimmed mean inflation. The augmented wage Phillips curve incorporates underemployment, labor productivity growth and year-on-year changes in the terms of trade as additional explanatory variables.

^{Box 3.}

House-Prices-at-Risk in Australia

After a prolonged downturn, housing markets in Australia have begun to recover. Still relatively high valuations and elevated household debt warrant careful monitoring of risks.

House-Prices-at-Risk (HaR) measures risks to future house prices.¹ HaR quantifies expected changes in house prices at a certain percentile in response to changes in pricing factors. Risks to future house prices are related to financial conditions, overvaluation factors, and capital flows. Tighter financial conditions can affect house prices adversely through higher borrowing costs. Overvaluation (proxied by house prices to GDP per capita relative to historical averages) is associated with downside risk, as a stretched price likely signals a future price correction. Other factors, including capital flows and household leverage, also affect risks.

Staff estimates indicate that downside risks to Australia’s house prices at the national-level have eased after the house price correction, with upside risks beginning to build. The national-level HaR over a four-quarter horizon deteriorated gradually and tilted to the downside beginning in 2016 due to overvaluation concerns. Since the beginning of 2019, downside risks have been reduced, although some risks remain. Conditional on 2019Q4 economic conditions, real house prices in Australia would fall by 4 percent over the next four quarters with a 10-percent likelihood. At the same time, upside risks have increased as illustrated by the 90^th percentile of the expected distribution four quarters into the future.

Downside risks in Sydney and Melbourne remain. In the two largest cities where there were large price increases during the boom period, downside risks to future house prices have eased but remain.

¹ See October 2019 Global Financial Stability Report (Chapter 2).

^{Box 4.}

Housing Prices and Affordability

The 2017–19 housing price correction and lower mortgage rates have improved housing affordability, but median-priced homes remain difficult to afford for average two-earner households. Stimulating a stronger supply response remains important for restoring broad-based affordability.

Housing prices have grown faster than income. This long-term trend, reinforced during the 2012–17 housing boom, was only partially corrected in the subsequent price decline through mid-2019, before prices started rising again. House-price-to-income (HPI) ratios increased particularly fast in the population centers, Sydney and Melbourne, in 2012–17, making them the least affordable major cities for owner-occupiers in Australia. In contrast, the HPI ratio for Perth suggests that affordability may have been restored to pre-mining boom levels.

A practical benchmark for the affordability of housing is its financial attainability. The borrowing capacity approach is based on the maximum size of a mortgage loan attainable by a household to finance a home purchase given its income, the prevailing mortgage rate, and leverage requirements.¹ This attainable housing price indicator therefore reflects the level of house prices that can be explained by demand fundamentals.

House prices at the national level have consistently exceeded the attainable level albeit with a narrowing of the gap recently. Actual housing prices in Australia in December 2019 were about 7 percent higher than attainable under a debt-service-to-income ratio (DSTI) of 25 percent. This gap has narrowed following the 2017–19 price correction but remains significant. Gaps are much higher in Sydney and Melbourne, where households would need to be able to carry a DSTI of 40 percent or higher for housing to be attainable. By contrast, in Perth, where housing prices have fallen since the end of the mining boom in 2014, affordability has improved significantly, with housing prices attainable with a DSTI of below 25 percent.

¹ Andrle, M. and M. Plašil, 2019, “Assessing House Prices with Prudential and Valuation Measures,” IMF Working Paper, WP/19/59.^2/ Attainable house prices are estimated by using household disposable income per capita by fiscal year (end-June), assuming that each household is made up of two per capita income earners. Affordable housing cost is assumed to be in the conventional range of a debt service to household income ratio (DSTI) of 25 to 40 percent. The mortgage rate is the standard variable rate for owner-occupier (RBA), applying to a principal and interest loan of 30-year maturity. The mortgage is to finance up to a loan-to value ratio of 80 percent, with a down payment of 20 percent of the house price in cash. Actual house prices are median value of dwellings in June of each year (except for 2019*) reported by CoreLogic. *2019 represents actual house prices in December 2019 and attainable house prices estimated by extrapolating household disposable income per capita in end-December 2019.

Table 1.

Australia: Main Economic Indicators, 2015–2025

(Annual percent change, unless otherwise indicated)

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.

Table 1.

Australia: Main Economic Indicators, 2015–2025

(Annual percent change, unless otherwise indicated)

				2015	2016	2017	2018	2019	2020	2021	2022	2023	2024	2025
								Projections
NATIONAL ACCOUNTS
Real GDP				2.3	2.8	2.5	2.7	1.8	2.0	2.4	2.5	2.6	2.6	2.6
	Domestic demand			1.0	1.8	3.0	2.9	1.1	1.7	2.4	2.5	2.5	2.5	2.5
		Private consumption		2.4	2.7	2.5	2.7	1.4	1.8	2.7	2.7	2.7	2.6	2.6
		Public consumption		4.0	5.1	3.9	4.0	5.2	2.9	2.0	2.0	2.0	2.2	2.2
		Investment		-4.0	-2.3	3.5	2.4	-2.8	0.3	2.0	2.6	2.8	2.8	2.7
			Public	-1.5	14.0	10.4	2.1	1.5	3.4	1.8	1.4	1.2	1.2	1.2
			Private business	-9.9	-11.8	4.0	3.2	-0.7	1.0	2.6	3.4	3.8	3.8	3.6
			Dwelling	9.1	8.0	-2.2	4.7	-6.9	-5.3	1.0	2.3	2.4	2.5	2.0
	Net exports (contribution to growth, percentage points)			0.9	1.4	-0.8	0.2	1.0	0.0	0.0	0.0	0.1	0.1	0.1
Gross domestic income				-0.2	2.8	4.9	3.1	3.4	2.3	1.3	1.3	2.0	2.3	2.4
Investment (percent of GDP) ^1/				25.9	24.6	24.2	24.2	22.5	22.3	22.4	22.7	22.8	22.8	22.8
	Public			4.4	4.8	5.1	5.1	5.0	5.0	5.0	5.0	5.0	4.9	4.8
	Private			21.4	19.7	19.1	19.0	17.7	17.3	17.4	17.6	17.8	17.9	18.0
	Mining investment			5.4	3.9	3.1	2.7	2.5	2.7	2.7	2.7	2.7	2.7	2.7
	Non-mining investment			16.0	15.8	16.0	16.3	15.1	14.7	14.7	14.9	15.1	15.2	15.3
Savings (gross, percent of GDP)				21.6	20.8	22.0	21.8	22.4	21.9	21.1	20.4	20.2	20.1	20.0
Potential output				2.6	2.5	2.4	2.3	2.2	2.2	2.2	2.3	2.4	2.5	2.5
Output gap (percent of potential)				-1.2	-0.9	-0.8	-0.4	-0.8	-1.0	-0.8	-0.6	-0.4	-0.2	0.0
LABOR MARKET
Employment				2.0	1.8	2.3	2.7	2.3	2.0	1.8	1.8	1.8	1.8	1.7
Unemployment (percent of labor force)				6.1	5.7	5.6	5.3	5.2	5.2	5.2	5.1	5.0	4.9	4.8
Wages (nominal percent change)				2.1	1.9	1.8	2.1	2.2	2.2	2.3	2.6	3.0	3.3	3.3
PRICES
Terms of trade index (goods, avg)				88	87	100	103	112	110	105	100	97	95	94
		% change		-12.4	-0.4	14.5	3.1	8.6	-2.0	-4.2	-5.2	-3.1	-1.5	-1.1
	Iron ore prices (index)			44	46	56	55	74	69	61	56	54	54	54
	Coal prices (index)			67	75	101	121	88	83	86	88	88	88	88
	LNG prices (index)			61	42	41	55	31	28	35	37	37	37	37
	Crude prices (Brent; index)			48	40	50	65	59	60	55	53	52	52	53
Consumer prices (avg)				1.5	1.3	2.0	1.9	1.6	1.9	1.9	2.1	2.3	2.5	2.5
	Core consumer prices (avg)			2.3	1.7	1.6	1.6	1.6	1.8	1.9	2.1	2.3	2.5	2.5
GDP deflator (avg)				-0.7	1.0	3.7	2.2	3.3	1.2	0.8	1.3	2.0	2.2	2.3
FINANCIAL
Reserve Bank of Australia cash rate (percent, avg)				2.1	1.7	1.5	1.5	1.2	0.4	0.3	0.5	1.0	1.5	2.0
10-year treasury bond yield (percent, avg)				2.7	2.3	2.6	2.6	1.4	0.5	0.5	0.9	1.4	1.9	2.4
Mortgage lending rate (percent, avg)				5.6	5.4	5.2	5.3	4.8	4.3	4.3	4.8	5.3	5.8	6.3
MACRO-FINANCIAL
Credit to the private sector				6.8	5.6	5.2	4.7	2.3	3.4	4.3	4.5	4.8	5.0	5.0
House price index				131	141	148	140	144	149	154	159	163	168	173
	% change			8.7	7.7	5.0	-5.1	2.5	3.7	3.4	3.0	3.0	3.0	3.0
House price-to-income, capital cities (ratio)				4.5	4.7	4.7	4.4	4.3	4.3	4.3	4.2	4.2	4.1	3.9
Interest payments (percent of disposable income)				8.8	8.6	8.9	9.0	7.4	6.4	6.3	7.1	7.8	8.5	8.5
Household savings (percent of disposable income)				6.4	5.0	4.1	2.9	3.4	4.3	3.6	3.2	3.2	3.2	3.3
Household debt (percent of disposable income) ^2/				173	180	187	187	185	183	181	178	175	172	170
Business credit (percent of GDP)				51	51	50	50	49	49	49	50	50	50	51
GENERAL GOVERNMENT (percent of GDP) ^3/
Revenue				34.2	34.8	34.6	35.5	36.0	35.8	36.0	35.9	35.3	35.3	35.3
Expenditure				37.2	37.5	36.9	36.6	36.8	36.9	36.6	36.1	35.4	35.2	35.1
Net lending/borrowing				-2.9	-2.7	-2.3	-1.1	-0.8	-1.0	-0.6	-0.1	0.0	0.2	0.3
	Commonwealth only			-2.6	-2.3	-1.9	-0.3	0.1	0.2	0.2	0.4	0.1	0.3	0.4
Operating balance				-1.7	-1.4	-0.8	0.5	1.0	0.9	1.4	1.7	1.6	1.7	1.8
Cyclically adjusted balance				-2.7	-2.4	-2.2	-1.0	-0.7	-0.9	-0.4	0.0	0.1	0.2	0.3
Gross debt				35.8	39.5	41.0	41.2	41.7	43.0	42.7	43.0	41.7	40.2	38.7
Net debt				16.4	19.0	18.5	19.1	19.8	20.9	20.8	20.1	19.1	17.9	16.7
Net worth				50.9	46.0	50.1	49.5	34.9	42.7	44.4	46.4	47.5	47.1	46.6
BALANCE OF PAYMENTS
Current account (percent of GDP)				-4.6	-3.3	-2.6	-2.1	0.4	-0.4	-1.3	-2.2	-2.6	-2.8	-2.8
Export volume				6.5	6.9	3.4	5.1	3.5	1.7	2.1	2.1	2.3	2.3	2.5
Import volume				2.0	0.1	7.8	4.1	-1.1	1.6	2.4	2.1	2.0	2.0	2.0
Net international investment position (percent of GDP)				-56	-57	-54	-54	-49	-48	-48	-48	-49	-49	-50
Gross official reserves (bn A$)				63	74	85	76	…	…	…	…	…	…	…
MEMORANDUM ITEMS
Nominal GDP (bn A$)				1,641	1,703	1,808	1,899	1,995	2,060	2,127	2,209	2,314	2,427	2,547
	Percent change			1.6	3.8	6.2	5.0	5.1	3.3	3.3	3.9	4.7	4.9	5.0
Real GDP per capita (% change)				0.8	1.1	0.8	1.1	0.2	0.5	0.9	0.9	1.1	1.1	1.1
Population (million)				24.0	24.4	24.8	25.2	25.6	26.0	26.4	26.8	27.2	27.6	28.0
Nominal effective exchange rate				90	91	94	90	…	…	…	…	…	…	…
Real effective exchange rate				90	91	94	90	…	…	…	…	…	…	…

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

^{^1/}Includes changes in inventories.

^{^3/}Fiscal year ending June.

Table 1.

Australia: Main Economic Indicators, 2015–2025

(Annual percent change, unless otherwise indicated)

				2015	2016	2017	2018	2019	2020	2021	2022	2023	2024	2025
								Projections
NATIONAL ACCOUNTS
Real GDP				2.3	2.8	2.5	2.7	1.8	2.0	2.4	2.5	2.6	2.6	2.6
	Domestic demand			1.0	1.8	3.0	2.9	1.1	1.7	2.4	2.5	2.5	2.5	2.5
		Private consumption		2.4	2.7	2.5	2.7	1.4	1.8	2.7	2.7	2.7	2.6	2.6
		Public consumption		4.0	5.1	3.9	4.0	5.2	2.9	2.0	2.0	2.0	2.2	2.2
		Investment		-4.0	-2.3	3.5	2.4	-2.8	0.3	2.0	2.6	2.8	2.8	2.7
			Public	-1.5	14.0	10.4	2.1	1.5	3.4	1.8	1.4	1.2	1.2	1.2
			Private business	-9.9	-11.8	4.0	3.2	-0.7	1.0	2.6	3.4	3.8	3.8	3.6
			Dwelling	9.1	8.0	-2.2	4.7	-6.9	-5.3	1.0	2.3	2.4	2.5	2.0
	Net exports (contribution to growth, percentage points)			0.9	1.4	-0.8	0.2	1.0	0.0	0.0	0.0	0.1	0.1	0.1
Gross domestic income				-0.2	2.8	4.9	3.1	3.4	2.3	1.3	1.3	2.0	2.3	2.4
Investment (percent of GDP) ^1/				25.9	24.6	24.2	24.2	22.5	22.3	22.4	22.7	22.8	22.8	22.8
	Public			4.4	4.8	5.1	5.1	5.0	5.0	5.0	5.0	5.0	4.9	4.8
	Private			21.4	19.7	19.1	19.0	17.7	17.3	17.4	17.6	17.8	17.9	18.0
	Mining investment			5.4	3.9	3.1	2.7	2.5	2.7	2.7	2.7	2.7	2.7	2.7
	Non-mining investment			16.0	15.8	16.0	16.3	15.1	14.7	14.7	14.9	15.1	15.2	15.3
Savings (gross, percent of GDP)				21.6	20.8	22.0	21.8	22.4	21.9	21.1	20.4	20.2	20.1	20.0
Potential output				2.6	2.5	2.4	2.3	2.2	2.2	2.2	2.3	2.4	2.5	2.5
Output gap (percent of potential)				-1.2	-0.9	-0.8	-0.4	-0.8	-1.0	-0.8	-0.6	-0.4	-0.2	0.0
LABOR MARKET
Employment				2.0	1.8	2.3	2.7	2.3	2.0	1.8	1.8	1.8	1.8	1.7
Unemployment (percent of labor force)				6.1	5.7	5.6	5.3	5.2	5.2	5.2	5.1	5.0	4.9	4.8
Wages (nominal percent change)				2.1	1.9	1.8	2.1	2.2	2.2	2.3	2.6	3.0	3.3	3.3
PRICES
Terms of trade index (goods, avg)				88	87	100	103	112	110	105	100	97	95	94
		% change		-12.4	-0.4	14.5	3.1	8.6	-2.0	-4.2	-5.2	-3.1	-1.5	-1.1
	Iron ore prices (index)			44	46	56	55	74	69	61	56	54	54	54
	Coal prices (index)			67	75	101	121	88	83	86	88	88	88	88
	LNG prices (index)			61	42	41	55	31	28	35	37	37	37	37
	Crude prices (Brent; index)			48	40	50	65	59	60	55	53	52	52	53
Consumer prices (avg)				1.5	1.3	2.0	1.9	1.6	1.9	1.9	2.1	2.3	2.5	2.5
	Core consumer prices (avg)			2.3	1.7	1.6	1.6	1.6	1.8	1.9	2.1	2.3	2.5	2.5
GDP deflator (avg)				-0.7	1.0	3.7	2.2	3.3	1.2	0.8	1.3	2.0	2.2	2.3
FINANCIAL
Reserve Bank of Australia cash rate (percent, avg)				2.1	1.7	1.5	1.5	1.2	0.4	0.3	0.5	1.0	1.5	2.0
10-year treasury bond yield (percent, avg)				2.7	2.3	2.6	2.6	1.4	0.5	0.5	0.9	1.4	1.9	2.4
Mortgage lending rate (percent, avg)				5.6	5.4	5.2	5.3	4.8	4.3	4.3	4.8	5.3	5.8	6.3
MACRO-FINANCIAL
Credit to the private sector				6.8	5.6	5.2	4.7	2.3	3.4	4.3	4.5	4.8	5.0	5.0
House price index				131	141	148	140	144	149	154	159	163	168	173
	% change			8.7	7.7	5.0	-5.1	2.5	3.7	3.4	3.0	3.0	3.0	3.0
House price-to-income, capital cities (ratio)				4.5	4.7	4.7	4.4	4.3	4.3	4.3	4.2	4.2	4.1	3.9
Interest payments (percent of disposable income)				8.8	8.6	8.9	9.0	7.4	6.4	6.3	7.1	7.8	8.5	8.5
Household savings (percent of disposable income)				6.4	5.0	4.1	2.9	3.4	4.3	3.6	3.2	3.2	3.2	3.3
Household debt (percent of disposable income) ^2/				173	180	187	187	185	183	181	178	175	172	170
Business credit (percent of GDP)				51	51	50	50	49	49	49	50	50	50	51
GENERAL GOVERNMENT (percent of GDP) ^3/
Revenue				34.2	34.8	34.6	35.5	36.0	35.8	36.0	35.9	35.3	35.3	35.3
Expenditure				37.2	37.5	36.9	36.6	36.8	36.9	36.6	36.1	35.4	35.2	35.1
Net lending/borrowing				-2.9	-2.7	-2.3	-1.1	-0.8	-1.0	-0.6	-0.1	0.0	0.2	0.3
	Commonwealth only			-2.6	-2.3	-1.9	-0.3	0.1	0.2	0.2	0.4	0.1	0.3	0.4
Operating balance				-1.7	-1.4	-0.8	0.5	1.0	0.9	1.4	1.7	1.6	1.7	1.8
Cyclically adjusted balance				-2.7	-2.4	-2.2	-1.0	-0.7	-0.9	-0.4	0.0	0.1	0.2	0.3
Gross debt				35.8	39.5	41.0	41.2	41.7	43.0	42.7	43.0	41.7	40.2	38.7
Net debt				16.4	19.0	18.5	19.1	19.8	20.9	20.8	20.1	19.1	17.9	16.7
Net worth				50.9	46.0	50.1	49.5	34.9	42.7	44.4	46.4	47.5	47.1	46.6
BALANCE OF PAYMENTS
Current account (percent of GDP)				-4.6	-3.3	-2.6	-2.1	0.4	-0.4	-1.3	-2.2	-2.6	-2.8	-2.8
Export volume				6.5	6.9	3.4	5.1	3.5	1.7	2.1	2.1	2.3	2.3	2.5
Import volume				2.0	0.1	7.8	4.1	-1.1	1.6	2.4	2.1	2.0	2.0	2.0
Net international investment position (percent of GDP)				-56	-57	-54	-54	-49	-48	-48	-48	-49	-49	-50
Gross official reserves (bn A$)				63	74	85	76	…	…	…	…	…	…	…
MEMORANDUM ITEMS
Nominal GDP (bn A$)				1,641	1,703	1,808	1,899	1,995	2,060	2,127	2,209	2,314	2,427	2,547
	Percent change			1.6	3.8	6.2	5.0	5.1	3.3	3.3	3.9	4.7	4.9	5.0
Real GDP per capita (% change)				0.8	1.1	0.8	1.1	0.2	0.5	0.9	0.9	1.1	1.1	1.1
Population (million)				24.0	24.4	24.8	25.2	25.6	26.0	26.4	26.8	27.2	27.6	28.0
Nominal effective exchange rate				90	91	94	90	…	…	…	…	…	…	…
Real effective exchange rate				90	91	94	90	…	…	…	…	…	…	…

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

^{^1/}Includes changes in inventories.

^{^3/}Fiscal year ending June.

Table 2.

Australia: Fiscal Accounts, 2014/15–2024/25

(In percent of GDP, unless otherwise indicated)

Sources: Authorities’ data and IMF staff estimates and projections.

^{^1/}Accrual basis; GFS. Comprises the Commonwealth, and state, territory, and local goverments.

^{^2/}Includes Future Fund assets.

^{^3/}Excludes general revenue assistance to states and territories from revenue and expenditure.

^{^4/}Excludes Commonwealth payments for specific purposes from revenue and expenditure.

Table 2.

Australia: Fiscal Accounts, 2014/15–2024/25

(In percent of GDP, unless otherwise indicated)

				2014/15	2015/16	2016/17	2017/18	2018/19	2019/20	2020/21	2021/22	2022/23	2023/24	2024/25
								Est.	Projections
CONSOLIDATED GENERAL GOVERNMENT OPERATIONS ^1/
Revenue				34.2	34.8	34.6	35.5	36.0	35.8	36.0	35.9	35.3	35.3	35.3
	Tax revenue			27.3	27.9	27.6	28.6	28.8	28.9	29.1	29.3	28.9	28.9	28.9
		Direct taxes		20.0	20.2	20.1	21.1	21.5	21.4	21.7	21.9	21.5	21.5	21.5
			Individual and withholding	14.1	14.5	14.2	14.4	14.7	14.7	14.9	15.2	14.8	14.8	14.8
			Corporate	5.9	5.7	5.9	6.7	6.8	6.7	6.7	6.7	6.7	6.7	6.7
		Indirect taxes		7.3	7.7	7.5	7.5	7.3	7.4	7.4	7.4	7.4	7.4	7.4
			Of which: GST	3.4	3.6	3.5	3.5	3.4	3.3	3.4	3.4	3.4	3.4	3.4
	Non-tax revenue			6.9	6.9	7.0	6.9	7.2	7.0	6.9	6.7	6.5	6.4	6.4
Expenditure				37.2	37.5	36.9	36.6	36.8	36.9	36.6	36.1	35.4	35.2	35.1
	Expense			35.9	36.1	35.3	35.0	35.0	34.9	34.6	34.2	33.8	33.6	33.5
		Employee expenses		8.5	8.7	8.5	8.5	8.4	8.5	8.0	8.0	7.9	7.8	7.8
		Other operating expenses (excl. depreciation)		9.9	10.1	10.3	10.4	10.6	10.7	10.6	10.6	10.4	10.3	10.3
		Transfers		12.4	12.0	11.4	11.0	10.8	10.4	10.4	10.3	10.2	10.2	10.1
			Current	11.8	11.6	11.0	10.5	10.5	10.2	10.1	10.0	10.0	9.9	9.9
			Capital	0.5	0.4	0.4	0.5	0.3	0.2	0.3	0.3	0.2	0.2	0.2
		Interest (excl. superannuation)		1.5	1.5	1.4	1.4	1.3	1.3	1.3	1.2	1.2	1.2	1.2
		Other		3.8	3.9	3.8	3.7	3.9	4.0	4.2	4.1	4.1	4.1	4.1
	Net acquisition of nonfinancial assets			1.2	1.3	1.5	1.6	1.8	2.0	2.0	1.8	1.6	1.6	1.6
		Of which: Gross fixed capital formation		2.9	2.9	3.3	3.4	3.7	4.2	4.0	3.8	3.6	3.6	3.6
Operating balance				-1.7	-1.4	-0.8	0.5	1.0	0.9	1.4	1.7	1.6	1.7	1.8
Primary balance				-1.5	-1.2	-0.9	0.3	0.5	0.3	0.7	1.1	1.1	1.3	1.4
Net lending (+)/borrowing (-)				-2.9	-2.7	-2.3	-1.1	-0.8	-1.0	-0.6	-0.1	0.0	0.2	0.3
CONSOLIDATED GENERAL GOVERNMENT BALANCE SHEET
Liabilities				69.1	78.4	74.6	75.6	82.8	73.8	72.5	71.6	69.0	66.3	63.6
	Gross debt			35.8	39.5	41.0	41.2	41.7	43.0	42.7	43.0	41.7	40.2	38.7
		Commonwealth		26.3	30.4	32.3	32.3	33.1	32.5	31.7	31.6	30.2	29.1	27.8
		States, territories and local governments		9.5	9.1	8.7	8.9	8.5	10.5	11.0	11.4	11.5	11.2	10.9
	Other liabilities			33.3	38.9	33.6	34.4	41.1	30.8	29.8	28.6	27.3	26.1	24.9
Assets				120.0	124.4	124.7	125.1	117.6	116.5	116.9	118.0	116.6	113.4	110.2
	Financial assets			48.5	50.0	51.8	52.1	46.5	46.2	46.8	48.3	48.3	46.7	45.1
	Other assets			71.5	74.4	72.9	73.0	71.1	70.3	70.1	69.6	68.2	66.7	65.1
Net financial worth				-20.5	-28.4	-22.8	-23.5	-36.3	-27.6	-25.7	-23.3	-20.7	-19.6	-18.5
Net debt				16.4	19.0	18.5	19.1	19.8	20.9	20.8	20.1	19.1	17.9	16.7
	Commonwealth ^2/			14.9	18.0	18.3	18.6	19.2	18.2	17.4	16.4	15.6	14.6	13.5
	States, territories and local governments			1.6	1.0	0.1	0.4	0.6	2.8	3.4	3.6	3.5	3.3	3.2
Net worth				50.9	46.0	50.1	49.5	34.9	42.7	44.4	46.4	47.5	47.1	46.6
	Commonwealth			-18.6	-25.1	-22.6	-23.2	-27.9	-15.9	-15.0	-13.8	-12.6	-11.3	-10.0
	States, territories and local governments			69.5	71.1	72.7	72.7	62.8	58.6	59.4	60.2	60.1	58.4	56.6
MEMORANDUM ITEMS
Cyclically adjusted balance (in percent of potential GDP)				-2.7	-2.4	-2.2	-1.0	-0.7	-0.9	-0.4	0.0	0.1	0.2	0.3
	Fiscal impulse (change in CAB; in percent of potential GDP)			-0.1	-0.2	-0.3	-1.2	-0.3	0.2	-0.4	-0.4	-0.1	-0.1	-0.1
Change in real revenue (percent)				1.4	2.5	3.8	5.7	5.0	1.7	1.7	1.2	0.5	2.2	2.4
Change in real primary expenditure (percent)				1.3	1.0	2.6	0.5	3.9	2.0	1.7	1.7	1.5	1.4	2.0
Commonwealth general government ^3/
	Revenue			19.9	20.3	20.2	21.2	21.8	22.0	22.0	22.0	21.6	21.6	21.6
	Expenditure			22.5	22.6	22.1	21.5	21.6	21.7	21.7	21.7	21.4	21.3	21.2
	Net lending (+)/borrowing (-)			-2.6	-2.3	-1.9	-0.3	0.1	0.2	0.2	0.4	0.1	0.3	0.4
States, territories and local governments ^4/
	Revenue			13.6	14.0	13.7	13.7	13.5	13.4	13.6	13.5	13.3	13.4	13.4
	Expenditure			13.7	14.1	14.0	14.3	14.2	14.4	14.2	13.7	13.2	13.2	13.2
	Net lending (+)/borrowing (-)			-0.1	-0.1	-0.2	-0.5	-0.7	-1.0	-0.6	-0.2	0.1	0.2	0.2
Commonwealth transfers to subnational governments				6.6	6.6	6.7	6.8	6.8	6.4	6.7	6.7	6.7	6.7	6.7
	Of which: General revenue assistance			3.6	3.6	3.6	3.6	3.6	3.4	3.4	3.5	3.5	3.5	3.5
Nonfinancial public sector capital stock				99.4	103.2	100.3	101.0	100.1	102.3	103.3	103.2	101.7	99.9	98.0
GDP (in billion A$)				1,624	1,661	1,764	1,850	1,948	2,029	2,093	2,164	2,261	2,369	2,486

Sources: Authorities’ data and IMF staff estimates and projections.

^{^1/}Accrual basis; GFS. Comprises the Commonwealth, and state, territory, and local goverments.

^{^2/}Includes Future Fund assets.

^{^3/}Excludes general revenue assistance to states and territories from revenue and expenditure.

^{^4/}Excludes Commonwealth payments for specific purposes from revenue and expenditure.

Table 2.

Australia: Fiscal Accounts, 2014/15–2024/25

(In percent of GDP, unless otherwise indicated)

				2014/15	2015/16	2016/17	2017/18	2018/19	2019/20	2020/21	2021/22	2022/23	2023/24	2024/25
								Est.	Projections
CONSOLIDATED GENERAL GOVERNMENT OPERATIONS ^1/
Revenue				34.2	34.8	34.6	35.5	36.0	35.8	36.0	35.9	35.3	35.3	35.3
	Tax revenue			27.3	27.9	27.6	28.6	28.8	28.9	29.1	29.3	28.9	28.9	28.9
		Direct taxes		20.0	20.2	20.1	21.1	21.5	21.4	21.7	21.9	21.5	21.5	21.5
			Individual and withholding	14.1	14.5	14.2	14.4	14.7	14.7	14.9	15.2	14.8	14.8	14.8
			Corporate	5.9	5.7	5.9	6.7	6.8	6.7	6.7	6.7	6.7	6.7	6.7
		Indirect taxes		7.3	7.7	7.5	7.5	7.3	7.4	7.4	7.4	7.4	7.4	7.4
			Of which: GST	3.4	3.6	3.5	3.5	3.4	3.3	3.4	3.4	3.4	3.4	3.4
	Non-tax revenue			6.9	6.9	7.0	6.9	7.2	7.0	6.9	6.7	6.5	6.4	6.4
Expenditure				37.2	37.5	36.9	36.6	36.8	36.9	36.6	36.1	35.4	35.2	35.1
	Expense			35.9	36.1	35.3	35.0	35.0	34.9	34.6	34.2	33.8	33.6	33.5
		Employee expenses		8.5	8.7	8.5	8.5	8.4	8.5	8.0	8.0	7.9	7.8	7.8
		Other operating expenses (excl. depreciation)		9.9	10.1	10.3	10.4	10.6	10.7	10.6	10.6	10.4	10.3	10.3
		Transfers		12.4	12.0	11.4	11.0	10.8	10.4	10.4	10.3	10.2	10.2	10.1
			Current	11.8	11.6	11.0	10.5	10.5	10.2	10.1	10.0	10.0	9.9	9.9
			Capital	0.5	0.4	0.4	0.5	0.3	0.2	0.3	0.3	0.2	0.2	0.2
		Interest (excl. superannuation)		1.5	1.5	1.4	1.4	1.3	1.3	1.3	1.2	1.2	1.2	1.2
		Other		3.8	3.9	3.8	3.7	3.9	4.0	4.2	4.1	4.1	4.1	4.1
	Net acquisition of nonfinancial assets			1.2	1.3	1.5	1.6	1.8	2.0	2.0	1.8	1.6	1.6	1.6
		Of which: Gross fixed capital formation		2.9	2.9	3.3	3.4	3.7	4.2	4.0	3.8	3.6	3.6	3.6
Operating balance				-1.7	-1.4	-0.8	0.5	1.0	0.9	1.4	1.7	1.6	1.7	1.8
Primary balance				-1.5	-1.2	-0.9	0.3	0.5	0.3	0.7	1.1	1.1	1.3	1.4
Net lending (+)/borrowing (-)				-2.9	-2.7	-2.3	-1.1

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Abstract

Context

A Fragile Recovery, Subject to Downside Risks

A. Recent Developments

B. Outlook

C. Risks

D. Authorities’ Views on Outlook and Risks

Supporting the Recovery with Accomodative Macroeconomic Policies

Context

Staff’s Views

Authorities’ Views

Enhancing Financial Sector Resilience

Context

Staff’s Views

Authorities’ Views

Navigating the Swift Recovery in Housing Markets

Context

Staff’s Views

Authorities’ Views

Fostering Strong, Inclusive and Sustainable Growth

Context

Staff’s Views

Authorities’ Views

Staff Appraisal