In its latest remarks on the Australian economy, published on Friday (13 December), the International Monetary Fund (IMF) noted that economic growth should continue to recover gradually toward its medium-term potential, with inflation remaining below the target range in the near term.
“Risks to the outlook are tilted to the downside amid subdued domestic confidence, heightened global policy uncertainty and the risk of a faster slowdown in China,” the IMF report said.
“In this context, macro-economic policies should remain accommodative, and the expected reduction in state-level infrastructure spending in FY2020/21 should be reconsidered. If downside risks materialise, stronger fiscal and monetary stimulus would be warranted. Macroprudential policy should stand ready to tighten in case of increasing risks to financial stability.”
The IMF believes continued efforts are warranted to foster strong, inclusive, and sustainable growth.
“Priorities for structural reforms include supporting business investment, strengthening innovation capacity, making the tax system more efficient, and pursuing policies to limit greenhouse gas emissions,” the IMF said.
Australia is especially exposed to a deeper-than-expected downturn in China through exports of commodities and services, the IMF warned. The report noted that a renewed escalation of US-China trade tensions could further impair global business sentiment, discouraging investment in Australia, and that a sharp tightening of global financial conditions could squeeze Australian banks’ wholesale funding and raise borrowing costs in the economy.
“On the domestic side, private consumption could be weaker should a cooling in labor markets squeeze household income. Adverse weather conditions, including a more-severe-than-expected drought, could further disrupt agriculture, dampening growth,” the IMF said.
“On the upside, looser financial conditions could reaccelerate asset price inflation, boosting private consumption but also adding to medium-term vulnerabilities given high household debt levels.”
