Australian economy on ‘narrow path to a soft landing’: IMF

The average mortgage lending rate is set to peak at 7.1 per cent in 2023, the International Monetary Fund (IMF) has evaluated.

It signifies the start of a slight slide to 6.3 per cent between the years 2025–28, it forecasted further, citing annual average Reserve Bank of Australia (RBA) cash rate targets of 3.8 per cent this year, 3.9 per cent in 2024, then a targeted drop to 3.4 per cent in 2025, and followed by 3.0 per cent cash rate stability until 2028.

The global agency’s view had come following a largely positive review of the Australian economy post-pandemic, in which the IMF flagged comprehensive tax reform so that “windfall revenue gains” could be directed to budget repair.

According to the IMF, Australia’s economy is on a “narrow path to a soft landing, with downside risks”.

Growth is expected to slow to 1.6 percent in 2023 from about 3.6 percent in 2022, as higher interest rates and weaker global growth “cut into domestic demand and net exports.”

“Inflation is projected to decelerate gradually toward the 2-3 percent inflation target by end-2024,” it explained.

“Downside risks to the economic outlook dominate, with significant uncertainty regarding global growth, commodity prices, and domestic developments surrounding wages, housing prices, and the effect of tighter monetary conditions,” the agency stated.

In responding to the IMF’s appraisal, on Thursday (2 February) federal Treasurer Jim Chalmers MP said: “The IMF overnight gave a glowing report card for our Budget and economic plan.

“They praise our policies like expanded parental leave and cheaper childcare and acknowledge spending restraint in the budget helping to address the inflation challenge.”

In terms of the property and mortgage markets, the IMF said with the rising interest rates the nation’s housing prices were expected to “continue declining significantly” from their pandemic-era highs, but this is “unlikely to raise material financial stability concerns given prudent lending standards” and “significant buffers among banks and households”.

Australia’s housing affordability concerns have also earned the IMF’s attention, which it suspects are increasing given strongly rising rents and higher mortgage rates.

“A strong focus on boosting housing supply remains essential, supported by well-targeted support for lower-income households,” the IMF recommended.

“Close monitoring of the financial system amid tightening financial conditions will still be important. 

“The financial system appears to be robust, and the increase in banks’ required capital buffers is welcome.”

It added that an expected increase in bank wholesale funding at a time of higher rates and slowing growth may pose “some vulnerabilities” although liquidity coverage ratios are “well above regulatory minimum requirements,” it explained.

Cash rates to be data-driven

The IMF’s view of Australia’s counter-inflationary levers matched the RBA’s in that its cash rate objectives are not on a set path.

“Tighter financial conditions, erosion of real incomes amid high inflation, declining housing prices, and soft global growth point to a significant deceleration in Australia,” the IMF explained.

Inflation is projected to decline gradually, it outlined, but it said it remained above target until 2024, “subject to significant uncertainty.”

“Downside risks to growth stem from a stronger global downturn, persistently high inflation expectations, and rising geo-economic fragmentation,” it explained.

“Restrictive macroeconomic policies are needed in the near term to mitigate strong domestic demand and address inflation.

“Monetary policy needs to continue tightening in the short term as envisaged, but given considerable uncertainty regarding the speed and intensity of monetary policy transmission, the pace of rate increases should continue to be data-dependent.”

Housing affordability in focus

In blunt terms, the IMF recommended a range of strategies to help Australians with housing affordability amid the current rising rate backdrop.

It suggested near-term fiscal restraint should support monetary policy in addressing demand.

“Budgetary revenue overperformance should be saved, and the implementation of spending programs should remain judicious, with any additional cost-of-living support amid high inflation to be kept temporary and well targeted to the vulnerable,” it advocated.

Implementing comprehensive tax reforms and improving efficiency in expenditure programs, it said, “will pave the road for a credible consolidation path over the medium-term.”

Specifically, reviewing tax exemptions could help make the tax system more efficient and equitable, it has said.

That is, the capital gains tax exemption for the sale of main residences, costing around 2.5 per cent of GDP annually in foregone revenues, should be restricted, it added.

“More broadly, the planned publication of additional information on the distributional features of the tax system will be helpful in identifying areas where the tax system can be further strengthened,” the IMF challenged.

Additionally, it warned though that sizable structural spending pressures limit the degree of consolidation and “risk crowding out important spending priorities.”

“Reviewing existing, large spending programs and improving expenditure efficiency will be important to underpin medium-term fiscal consolidation,” the IMF said.

However, there were also opportunities to make the tax system “more efficient and equitable”, rebalancing it from currently “high direct” to “indirect” taxes and raise sufficient revenues to fund the government programs.

It explained that the Commonwealth government should direct windfall revenue gains to “budget repair” with a view to “creating additional fiscal buffers” to “address future shocks”.

“Financial stability risks from the housing price correction appear to remain contained, and policies should aim to alleviate deteriorating housing affordability,” it concluded. 

The @IMFNews overnight gave a glowing report card for our Budget and economic plan. They praise our policies like expanded parental leave & cheaper childcare & acknowledge spending restraint in the Budget helping to address the inflation challenge. #auspol https://t.co/xfjB3y65CI — Jim Chalmers MP (@JEChalmers) 1 February 2023

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