Australia shielded by policies: IMFAustralia is being protected from a weakening global economy by prudent government policies and a flexible currency, the International Monetary Fund (IMF) says.
In its April 2008 World Economic Outlook released, the IMF also predicts the US falling into a mild recession and has cut its forecast for global growth this year. The IMF said the growth momentum in Australia remained robust and the turbulence in global financial markets had so far had only a limited impact on its economy. In contrast, the IMF expects the United States to tip into a mild recession in 2008 and show a limp 0.5 per cent growth pace in 2008, and just 0.6 per cent growth in 2009. "The (US) economy is slowing rapidly in early 2008," the IMF said. "The baseline projections envisage that the economy will tip into modest recession in 2008, followed by a gradual recovery in 2009 that will be somewhat slower than that following the 2001 recession as household and financial balance sheets are repaired." It cut its projection for global GDP growth by a further 0.5 percentage points from its January forecast to 3.7 per cent in 2008, and 1.25 percentage points lower than the growth recorded in 2007. But Australia, and neighbouring New Zealand, is shielded from this downturn to some extent, it said. "Prudent fiscal policies and flexible exchange rates continue to provide Australia and New Zealand with important buffers against any substantial weakening in the external environment," it said. It says Australia's direct exposure to the US subprime market appears to be small, although retail banks have passed on some of the elevated costs of funding in the form of higher lending rates. On Australia's major trading partner, China, the IMF expects GDP growth to ease to 9.3 per cent in 2008 from 11.4 per cent in 2007, largely reflecting slower exports to the US and western Europe. The projected easing of growth in China may be more moderate if consumption continues to gather speed and policy measures aimed at slowing investment growth fail to have the intended effect." IMF UPDATE: JULY 1 2008: Extracted from:Australia—2008 Article IV Consultation: Concluding StatementJuly 1, 2008 This statement contains our preliminary policy recommendations following discussions with the Australian authorities and a range of private sector institutions. The discussions focused on the policies necessary to reduce inflation, maintain financial stability, and foster strong growth prospects over the medium term. Sound macroeconomic policies and structural reforms have delivered a prolonged expansion...the commodity driven boom has pushed up against capacity constraints, with unemployment falling to the lowest rate since the mid-1970s and capacity utilization rising to historic highs....... ... The global financial turmoil that emerged in mid-2007 and the extraordinary jump in Australia's commodity export prices in recent months present additional challenges. Underlying inflation is the highest it has been since the introduction of inflation targeting in the early 1990s, and monetary and fiscal policy will need to focus on reducing inflation. The global financial turmoil has illustrated the resilience of Australia's financial system and highlighted the role of the sound macroeconomic policy framework, the flexible economy, and the importance of structural reform. The Outlook and Risks.... We share the authorities' view that activity is beginning to slow as required to reduce inflation. .. However, the jump in commodity prices and cuts in personal income taxes will provide support for economic activity... ..in our view the balance of risk to growth is tilted toward the upside, stemming from the recent jump in commodity prices, sizable immigration flows, and the increase in state infrastructure spending. ... Further increases in energy prices are in the pipeline and capacity constraints, especially in the mining and housing sectors, could push wage and CPI inflation higher than envisaged..... On the downside, a global slump could weaken export demand, and further international financial turmoil could tighten credit conditions and increase banks' funding costs. In addition, farm output may not rebound from the drought as expected. Monetary Policy ... A firm monetary policy stance is essential for keeping medium-term inflation expectations well anchored. The risk that wage inflation will rise further if CPI inflation persists at current levels calls for the RBA to maintain a tight policy stance until it is clear that inflation will abate. .... The existing inflation-targeting framework is appropriate. The benefits of the framework are illustrated clearly when there are large shocks to inflation. ... We welcome the moves to improve the transparency of monetary policy decision making. The publication of a statement explaining the RBA's interest rate decision at the conclusion of every policy meeting, followed two weeks later by the release of detailed meeting minutes, should enhance public understanding of monetary policy decisions. Exchange Rate and External Stability ... The flexible exchange rate has been helpful for monetary policy. The appreciation in recent years, driven by higher terms of trade and interest rate differentials, has contained inflation by reducing import prices and lowering demand for domestic resources. We estimate that the currency is above its long-run equilibrium level, reflecting positive interest rate differentials that have attracted capital inflows. Over time, the currency is expected to fall back toward equilibrium as the RBA reduces the cash rate once inflation moderates. However, with a portion of the improvement in the terms of trade likely to be permanent, the currency is expected to remain above its average for the last ten years. ...In recent years, the buildup in foreign debt, especially short-term debt, has increased external vulnerability. Mitigating factors include the limited currency risk associated with the foreign debt, low public sector debt, the healthy banking system, and the sound macroeconomic policy and financial supervision frameworks. Australia's current account deficits largely reflect high investment rather than low saving, and should be sustainable as long as investment leads to growth in export capacity.
Fiscal Policy
... Fiscal policy focused on medium-term sustainability has delivered a sequence of surpluses that has eliminated commonwealth net debt. This leaves Australia with a strong fiscal position, an enviable situation by international standards.... We support the strategy in the latest budget to save the revenue windfall from the commodity driven boom and thereby allow automatic stabilizers to support monetary policy. Saving some of the revenue from the commodity price boom in three new funds will take pressure off monetary policy in the near term and enable increased infrastructure investment over the medium term. ...The reduction in public spending growth in the latest budget illustrates the government's commitment to help reduce inflation.... .... The states have increased capital spending and their budget balance has shifted to a small deficit in aggregate, thereby adding stimulus to the economy..... .. To the extent that the improvement in the budget balance is structural, associated with permanently higher commodity prices, this should provide scope to reduce taxes or increase spending over the medium term. The governments' intention to achieve a positive balance over the medium term should increase public net worth, further strengthening the fiscal position. ... Financial Sector .. The soundness of Australia's banks was demonstrated during the recent global financial turmoil. Since banks had minimal exposure to sub-prime assets, the main impact of the crisis was a sharp increase in funding costs... ... Although the major banks were able to maintain access to offshore markets, the turmoil highlighted financial institutions' vulnerability to rollover risks arising from short-term wholesale funding. Some of the smaller financial institutions that relied more heavily on capital markets, particularly securitization, for funding were more affected than institutions that had sizable deposit bases.... ... Nevertheless, banks remain profitable and well capitalized, and asset quality is high by international standards, despite a marginal increase in non-performing loans. It is encouraging that banks are drawing lessons from the global turmoil, and are increasing liquidity as well as lengthening the maturity of their funding and diversifying the sources... ... Our analysis using extreme stress test scenarios applied to the large banks suggests that they would remain resilient if there were a jump in funding costs or a sharp increase in mortgage loan defaults.... Structural Reform ....We encourage the authorities to use the window of opportunity provided by Australia's robust economic performance and the strong fiscal position to advance structural reforms.... The commonwealth and state governments have set ambitious reform programs in areas such as tax reform, competition and regulatory policy, healthcare, education, infrastructure, emissions trading, water management, and commonwealth-state funding arrangements.
The above extract can be seen in full here: http://www.imf.org/external/np/ms/2008/070108.htm |
