‘Below potential’: IMF warns of downside risks for Australian economy

SYDNEY, Dec 13, 2019, SMH. The International Monetary Fund has told the Morrison government to ditch its promised budget surplus and make direct cash payments to households if the economy deteriorates while urging all levels of government to bring forward more infrastructure spending, The Sydney Morning Herald reported.

In preliminary comments ahead of its annual review of the economy, the IMF also said the Reserve Bank may have to undertake unconventional monetary policies such as quantitative easing to bolster an economy it warned faced downside risks and only a gradual improvement over the coming year.

Every year, officials from the IMF spend time in Australia talking to public authorities and private sector economists to gauge the economy’s performance. At the start of the year, the fund expected the economy to grow 2.7 per cent, unemployment to fall to 4.8 per cent, wages to lift and household debt levels to drop.

Instead, the economy has under-performed on almost all key indicators while the RBA has sliced the official cash rate to an all-time low of 0.75 per cent. The IMF thought this year it would remain stable before increasing in 2020.

In a statement, the IMF said while economic growth have improved from its low point it still “remained below potential”, dependent on public spending and net exports.

The drought has been a drag on growth, private demand “remained weak amid subdued confidence” while wages growth was sluggish.

The fund now expects the economy to grow by 2.2 per cent in 2020 with inflation set to remain short of the RBA’s own 2-3 per cent target band until 2021.

It said downside risks, including the fallout from global trade tensions and ongoing soft private consumption, meant governments and the RBA had to be prepared to deliver a “coordinated response” to boost the economy.

“In addition to letting automatic stabilisers operate, commonwealth and state governments should be prepared to enact temporary measures such as buttressing infrastructure spending, including maintenance, and introducing tax breaks for small-medium sized enterprises, bonuses for retraining and education, or cash transfers to households,” it said.

“In case stimulus is necessary, the implementation of budget repair should be delayed, as permitted under the commonwealth government’s medium-term fiscal strategy.

“In addition, unconventional monetary policy measures such as quantitative easing may become necessary in such a scenario as the cash rate is already close to the effective lower bound.”

The Morrison government last month announced it was pulling forward $1.8 billion worth of infrastructure projects into the next 18 months.

The IMF said state governments need to reconsider their own plans to tighten spending and reduce infrastructure expenditure in the 2020-21 financial year, backing an increase in public works.

While noting there had been an improvement in house prices in the Sydney and Melbourne markets, the fund said housing affordability remained a critical issue for the country.

“More efficient long-term planning, zoning, and local government reform that promote housing supply growth, along with a particular focus on infrastructure development, including through “City Deals”, should help meet growing demand for housing,” it said.

The fund called for broad-based tax reform, starting with changes to the GST, while backing special investment allowances for the business sector.

It also found the federal government could go further to boost female workforce participation and reduce youth under-employment, saying the recent changes to childcare could act as a stepping stone to even larger reforms.

“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 training can help reduce youth underemployment,” it said.