The IMF sees a stalling in Australia's disinflation process, risking higher-for-even-longer interest rates that adversely impact consumption and investment there. They also see weaknesses in Australia's major trading partners

On Christmas eve, the IMF released its updated assessment of Australia. The original is here. The following is the press release.

The Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation¹ with Australia on December 2, 2024, and endorsed the staff appraisal without a meeting on a lapse-of-time basis.²

Australia’s economic growth slowed to 1.0 percent (y/y) in Q2 2024 from 1.9 percent a year prior, with private consumption growth dropping to 0.5 percent (y/y). Growth in private business investment also eased to 1.6 percent (y/y). Economic activity was bolstered by public demand and infrastructure projects. Labor market conditions have been softening gradually, with unemployment at 4.1 percent in September 2024, while job creation remains strong. The current account returned to deficit in early 2024, as commodity prices continued to normalize. Inflation has eased from post-pandemic highs, dropping to 2.8 percent (y/y) in Q3 2024, although underlying pressures persist, especially in non-tradable sectors. National housing prices have surpassed pandemic peaks and rents have risen amid historically low vacancy rates. The government achieved a budget surplus in FY2023/24, for the second year in a row, while implementing cost-of-living measures.

Growth is projected to pick up gradually, from 1.2 percent in 2024 to 2.1 percent in 2025. Real income growth from rising wages and tax cuts may boost private consumption, while public demand will remain strong. Private demand should also benefit from monetary easing and a pick-up in dwelling construction next year, but growth will remain below potential until 2026. Unemployment is projected to rise gradually to 4.5 percent. Trimmed mean inflation is expected to return to the RBA’s target range by end-2025 and the mid-point in 2026 – with headline inflation more volatile reflecting the impact of temporary energy rebates.

With significant uncertainty surrounding the macroeconomic outlook, the balance of risks is tilted to the downside. Domestically, persistent labor market tightness, stronger than expected fiscal impulses and lower spare capacity than currently assessed could contribute to stalling the disinflation process, potentially leading to higher-for-even-longer interest rates that adversely impact consumption and investment. Conversely, weaker-than-expected growth or a faster-than-projected increase in unemployment may prompt the Reserve Bank to lower interest rates sooner. External risks include weakness in major trading partners, geo-economic fragmentation affecting global trade, and rising shipping costs and volatile energy and food prices amid escalating geopolitical tensions, which could also complicate the disinflation process. Australia’s role in the Pacific continues to enhance regional stability through aid and remittances, while labor migration also helps alleviate Australia’s domestic capacity constraints and skills shortages.

Executive Board Assessment³

In concluding the 2024 Article IV consultation with Australia, Executive Directors endorsed the staff’s appraisal, as follows:

Australia remains on a narrow path to a soft landing, but risks are tilted to the downside. Growth slowed in the first half of the year, with household consumption weak as real incomes remained soft. Despite rising unemployment, the labor market remains resilient. Growth is expected to pick up over the following quarters, supported by a gradual recovery in private demand and robust public demand. Downside risks to growth include persistent weakness in private demand or a further slowdown in key trading partners.

Near-term policies should focus on managing the final descent of inflation to target, while nurturing growth. Inflation is anticipated to sustainably return to the RBA’s target range only by the end of 2025, while a potential stall in disinflation poses a significant risk. In this context, the current restrictive monetary stance is appropriate, and needs to be supported by fiscal policy that avoids an expansionary stance and complements monetary policy’s disinflation objective. Reforms aimed at further bolstering the RBA's independence and supporting the coordination of monetary and fiscal policies are important.

If disinflation stalls, tighter monetary and fiscal policies may be necessary. This contingent macro policy mix should ensure monetary and fiscal authorities complement each other to avoid overburdening any single policy instrument, while preserving targeted support amid rising living costs. Monetary policy should be prepared to tighten further if upside inflation risks materialize, and expenditure rationalization at all levels of government could help reduce aggregate demand and support a quicker return of inflation to its target. Specifically, reprofiling public infrastructure investments and improving the targeting of transfer programs can help mitigate excess demand while better supporting the most vulnerable.

Over the medium term, broader tax and expenditure policy reforms should reduce structural deficits, promote economic efficiency, and safeguard long-term fiscal sustainability. Tax reforms should focus on efficiency and fairness, reducing dependence on direct taxes and high capital costs, and phasing out tax breaks like capital gains tax discounts. In light of longterm spending pressures from ongoing demographic headwinds, coupled with climate change, expenditure reforms should aim at enhancing efficiency and containing structural spending growth at all levels of government. Due consideration should be given to further strengthening fiscal policy frameworks with a clearer medium-term anchor to guide buffer rebuilding for future challenges.

Financial sector policies should focus on preserving stability while addressing localized vulnerabilities arising from tightened conditions. Macroprudential policies should remain stringent to protect household balance sheets, especially in the context of rising housing prices. Additionally, the authorities are encouraged to proactively adapt their macroprudential tools to preempt excessive buildup in household indebtedness, including when the time is appropriate for monetary policy easing. A comprehensive policy package is essential to tackle Australia’s housing affordability crisis, focusing on increasing the construction workforce, relaxing zoning regulations, advancing initiatives to boost new housing supply, and reevaluating property taxes and stamp duty.

Efforts to rejuvenate Australia’s productivity growth should be prioritized. Focus should be given to competition policy, reforms in capital and labor markets, and opportunities presented by AI technologies. Enhancing innovation by promoting R&D, supporting intellectual property rights, and ensuring policy certainty is vital. Improving the competition landscape, assessing the impact of non-compete clauses, and reforming merger rules are also crucial for productivity. Public awareness, access to training, and upskilling for affected workers are essential to maximize AI's productivity-enhancing benefits while mitigating its job displacement risks.

Australia's continued commitment to multilateral solutions, including the rules-based international trading system, is commendable. To avoid undue distortions, both domestically and internationally, green industrial policy (IP) initiatives should be confined to narrow objectives—where externalities or market failures prevent effective market solutions—and be consistent with the country’s international obligations. A stable climate is a global public good and the transition to a greener economy is a collective global responsibility, which requires a mix of mitigation, adaptation, and transition policies. Achieving Australia’s ambitious emission reduction goals depends on addressing construction bottlenecks and community engagement, with potential solutions like an economy-wide carbon price or targeted sectoral policies. Additionally, Australia's voluntary participation in reviewing transnational corruption sends a positive signal that could inspire improvements in global governance.

^{1 Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.}

^{2 The Executive Board takes decisions under its lapse-of-time procedure when the Board agrees that a proposal can be considered without convening formal discussions.}

^{3 At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here:}