Australia on Path to Broader-based Growth, says IMF

Economy buoyed by strong emerging market demand for commodities

With mining boom over its peak, key need is to transition to broader-based growth

Strong policy frameworks can ease the transition, but pickup in productivity growth also needed

The IMF’s Article IV report says the mining investment boom—which accounted for almost half of Australia’s GDP growth in the past couple of years—has peaked and the economy is moving to the mining production and export phase.

Mining-related investment is expected to drop sharply in the near term, and a recovery in non-mining investment will be needed to underpin demand, suggests the report.

Australia’s economy is expected to grow at 2½ percent this year—slightly below trend—and rise to about 3 percent by 2016. While resource exports will expand rapidly and contribute to future growth, the outlook for the non-resource sector is more uncertain, say the report’s authors.

Exchange rate moderately overvalued

Despite some recent depreciation, the IMF economists believe that Australia’s exchange rate is still moderately overvalued and is weighing down non-mining activity.

The main external risk to the Australian economy remains a slowdown in growth in China over the medium-term and a related fall in commodity prices.

“Australia’s flexible exchange rate provides a buffer against shocks and the authorities have both monetary and fiscal policy space to react if the outlook deteriorates,” said Brian Aitken, IMF mission chief to Australia.

Policies to sustain growth

In the report, the IMF economists say that Australia's fiscal position, with low debt and deficits, compares well to its advanced economy peers. The government’s aim to return the budget to surplus over the coming decade will help rebuild fiscal buffers and increase the ability to deal with adverse shocks. But this aim will be challenging in light of current social spending commitments.

“Monetary policy should remain accommodative—inflation is within the target range, growth is currently on the soft side, and the real exchange rate is still strong,” says Aitken. “Monetary policy should act as the primary macroeconomic tool for managing aggregate demand in the near term,” he added.

The report says that higher house prices would be expected to support demand through a more accommodative monetary policy.

After several years of weak activity during which house prices lagged growth and construction activity was weak, there have been signs of a pickup.

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