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IMF Country Report No. 21/255

AUSTRALIA

2021 ARTICLE IV CONSULTATION—PRESS RELEASE; STAFF REPORT; AND STATEMENT BY THE EXECUTIVE DIRECTOR FOR AUSTRALIA

December 2021

Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. In the context of the 2021 Article IV consultation with Australia, the following documents have been released and are included in this package:

• A Press Release summarizing the views of the Executive Board as expressed during its November 22, 2021 consideration of the staff report that concluded the Article IV consultation with Australia.

• The Staff Report prepared by a staff team of the IMF for the Executive Board’s consideration on November 22, 2021, following discussions that ended on September 23, 2021, with the officials of Australia on economic developments and policies. Based on information available at the time of these discussions, the staff report was completed on November 5, 2021.

• An Informational Annex prepared by the IMF staff.

• A Statement by the Executive Director for Australia. The document listed below has been separately released.

• Selected Issues

The IMF’s transparency policy allows for the deletion of market-sensitive information and premature disclosure of the authorities’ policy intentions in published staff reports and other documents.

Copies of this report are available to the public from

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PO Box 92780 • Washington, D.C. 20090

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International Monetary Fund

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© 2021 International Monetary Fund

Press Release

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PR21/362

IMF Executive Board Concludes 2021 Article IV Consultation with Australia

FOR IMMEDIATE RELEASE

Washington, DC – December 6, 2021: On November 22, 2021, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation¹ 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 Assessment²

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)

Sources: Authorities’ data; I MF 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, 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; I MF 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.

View Table

^{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; I MF 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.

Title page

AUSTRALIA

STAFF REPORT FOR THE 2021 ARTICLE IV CONSULTATION

November 5, 2021

KEY ISSUES

Context. Strong health and economic policies allowed for quick economic recovery from initial COVID-19-related lockdowns in 2020. Renewed outbreaks and lockdowns have created setbacks since mid-2021, with disproportionate impacts on some regions, sectors, and workers. Accommodative macroeconomic policies have been instrumental in cushioning the economic impact.

Outlook and risks. With gradual relaxation of restrictions enabled by rising vaccination r a tes, the economy is expected to resume its recovery, achieving growth rates of 3.5 and 4.1 percent in 2021 and 2022, respectively. With the anticipated recovery from the lockdowns, underlying inflation should rise gradually toward the mid-point of the 2–3 percent inflation target range. Given the unpredictable trajectory of the pandemic, risks are tilted to the downside in the near term, but broadly balanced beyond that.

Policy recommendations:

• Macroeconomic policies should remain appropriately accommodative and agile in the context of a quickly evolving economic environment. Fiscal policy should continue to support vulnerable households and affected businesses as needed and, in case downside risks materialize, consider additional stimulus to soften the pace of planned consolidation. Monetary policy should be data-dependent, calibrating the pace of normalization to the strength of the expected recovery and inflation.

• Macroprudential policy s ho uld co ntinue to focus on financial risks from surging house prices and elevated household debt. Additional tightening should be considered if risks continue to build.

• Structural policies should center on improving productivity performance and the inclusiveness and sustainability of the recovery. Priorities include promoting innovation and competition, supporting housing affordability, reducing uncertainty in climate change mitigation policies, and pursuing tax reforms to shift from direct to indirect taxes.

Approved By

Jonathan D. Ostry (APD) and Stephan Danninger(SPR)

Contents

• CONTEXT

• FAST RECOVERY, INTERRUPTED BY NEW OUTBREAKS

• A Recent Developments

• B. Outlook and Risks

• C. Authorities’ Views

• NAVIGATING THROUGH CONTINUED UNCERTAINTY

• ENHANCING FINANCIAL SECTOR RESILIENCE

• MANAGING HOUSING RISKS AND RESTORING AFFORDABILITY

• PROMOTING HIGH, SUSTAINABLE, AND INCLUSIVE GROWTH

• STAFF APPRAISAL

• BOXES

• 1. Australia’s Health Response to the COVID-19 Pandemic

• 2. Unprecedented Fiscal Stimulus, Calibrated to the Pace of Economic Recovery

• 3. Key Monetary and Liquidity Facilities Under COVID-19

• 4. Housing Market Trends During the Pandemic

• 5. SMEs During the Pandemic

• 6. China-Australia Relations and their Macroeconomic Impact

• 7 . The Sovereign Risk and Debt Sustainability Framework: An Application to Australia

• 8. Australia’s Productivity Slowdown

• FIGURES

• 1. COVID-19 Outbreaks and Their Labor Market Impact

• 2. The Australian Economy Has Been Facing Headwinds After a Strong Recovery

• 3. Temporary Factors and Terms-of-Trade Drive Current Account to Record High

• 4. The Housing Market is Booming

• 5. Monetary Policy Eased Substantially

• 6. Public Sector Balance Sheet Remains Resilient Despite Unprecedented Stimulus

• 7. The Banking Sector Remains Strong

• 8. Financial Market: Low Yields and Rising Equities

• 9. Australia’s Macro-Structural Position Highlights Issues Predating the Pandemic

• TABLES

• 1. Main Economic Indicators, 2016–2026

• 2. Fiscal Accounts, 2015/16–2025/26

• 3. Balance of Payments, 2016–2026

• 4. Selected Financial Soundness Indicators of the Banking Sector

• ANNEXES

• I. External Sector Assessment

• II. Drivers of Household Savings After the Pandemic

• III. Risk Assessment Matrix

• IV. Public Debt Sustainability Analysis

• V. Financial Sector Assessment Program (FSAP) Update

• VI. Inequality in Australia: Pre-COVID Trends and Impact of the Pandemic

• VII. Climate Change Mitigation in Australia