In its latest assessment of Australia’s finances, the global body said while the economy was performing well, growth was set to weaken, fuelled by cost of living pressures and a slowdown in productivity.
While the IMF said Australia’s inflation levels had peaked, they remained stubbornly high, estimating it would take another two years for it to return to the Reserve Bank’s target band of between two and three per cent.
It forecast that economic growth was expected to slow to 1.8 per cent year on year in 2023, before dropping again to 1.4 per cent in 2024.
“Faltering private consumption would continue to put a drag on the economy, as households with mortgages bear the brunt of higher interest rates, amidst lower real wages and depleting savings,” the IMF statement said.
“While external price pressures have abated, leading to an easing in goods inflation, persistence in non-tradeable prices driven by demand pressures will keep inflation elevated.”
The economic assessment saw the IMF praise the government’s macroeconomic policies, which had led to “strong recovery and resilience”.
It said the economic recovery in Australia following the global slowdown due to the COVID-19 pandemic remained stronger than similar countries, driven by strong net exports.
“The slowdown in households’ consumption growth was, however, offset by resilient private investment supported by public investment in transport, health, education and national defence,” the report said.
“Net exports contribute to growth on the back of robust sales of coal and service experts buoyed by inflows of foreign students, migrants and tourists.”
The IMF also warned that while strong net migration was expected to ease pressure on the labour market, it would add to demand in areas such as the rental market.
The monetary body said there was a need for further fiscal tightening to achieve target levels of inflation by 2025.
“Directors saw merit in a comprehensive tax reform and highlighted that rebalancing the tax system from direct to indirect taxes, while addressing regressive impacts, would promote greater efficiency,” the report said.
“Noting the renewed increases in house prices, directors recommended the adoption of additional borrower-based prudential tools.”
Treasurer Jim Chalmers welcomed the assessment by the IMF, saying it was an endorsement of the government’s economic strategy.
“The report makes it clear that our government is doing better than other countries when it comes to getting our budget into much better condition as a buffer against the global economic uncertainty ahead,” he said.
“The IMF rightly recognises our efforts across housing, competition, institutional reform, skills and training, climate and energy and making the tax system fairer.”
The monetary body said “continued vigilance” was needed by the government as economic conditions tightened.
“Short-term policies should focus on navigating the economy to a soft landing, by bringing inflation back to target, while maintaining financial stability. Policy coordination will be critical,” the report said.
Dr Chalmers said the report had confirmed Australia was addressing economic issues from a place of strength.
“The report out today follows recent endorsements of our fiscal strategy from the IMF itself, along with those from the RBA, OECD, international ratings agencies and others,” he said.
“While inflation is still a defining challenge, we are making encouraging progress.”