IMF Concludes Article IV Consultation With Australia

by Mary Swire, Tax-News.com, Hong Kong

12 August 2009

On August 5, 2009, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Australia.

Australia was in a strong economic position at the onset of the global recession. Sound macroeconomic policies and structural reforms, together with a stable external environment, delivered 17 years of continuous economic growth. National income was boosted in recent years by a commodity price boom, which pushed the terms of trade to its highest level in more than half a century. The Commonwealth government took advantage of the favorable environment and eliminated its net debt. Banks were also in a healthy position at the onset of the turmoil, with returns on equity of 15–20%. Furthermore, a conservative approach by regulators and supervisors meant that banks had relatively low leverage and high capital adequacy ratios.

The turmoil sparked by the collapse of Lehman Brothers in September 2008 had an immediate impact on Australian markets. Key commodity prices fell sharply, domestic money markets came under stress, offshore funding tightened, the currency depreciated, and equity prices plunged.

The crisis, however, has not hit real activity in Australia as hard as in many other advanced economies owing to limited higher-tech manufacturing, robust commodity exports, and an effective policy response. The IMF observed that the 425 basis point reduction in the Reserve Bank of Australia’s policy interest rate since September 2008 has been largely passed through to lending rates, while the sound banking system helped avoid a sharp contraction of credit. The flexible exchange rate has provided a buffer for export incomes. In addition, a sizable fiscal stimulus is being delivered, supporting domestic demand.

Nonetheless, the crisis highlighted some vulnerabilities and the IMF believes that the near-term outlook remains highly uncertain. Both household debt (at over 150% of disposable income in 2008) and short-term external borrowing (at over 50% of GDP in 2008) are high by advanced country standards. Unemployment has increased, but less so than in many other advanced countries. Aggressive policy action is expected to limit the decline in activity to 0.5% in 2009. The recovery will likely be slow, with growth of 1.5% projected for 2010, led by government spending on infrastructure, as households and businesses continue to deleverage.

In its recommendations, the IMF commended the Australian authorities for their timely policy response, noting in particular that its fiscal and monetary stimulus policy, flexible exchange rate and resilient banking sector, should underpin a sustained recovery. The IMF added that Australia remains in a strong position to deliver further macroeconomic policy stimulus if needed.

Regarding the Australian authorities’ targeted, temporary fiscal stimulus, which is expected to support domestic demand in 2009 and 2010, the IMF welcomed present policy actions, and warned that the government would need to exercise prudence, when deciding on future fiscal measures. The IMF Executive Board welcomed the government’s commitment to a deficit exit strategy, aimed at returning the budget to surpluses over the medium term. They recognized, however, that further fiscal adjustment could be needed to achieve this objective if trend growth and the terms of trade are lower than assumed.

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