IMF sees Australia ‘soft landing,’ cuts growth forecast

Australia will likely dodge recession this year even as its economic growth is set to more than halve on a combination of rising interest rates and a weakening global expansion, the International Monetary Fund (IMF) says.

“Australia’s economy is expected to come to a soft landing in 2023, although risks are skewed significantly to the downside,” IMF staff said in the concluding statement of their Article IV mission released yesterday.

They pointed to “tighter financial conditions, erosion of real incomes amid high inflation, declining housing prices, and soft global growth” as threats.

The fund expects the A$2.2 trillion (US$1.6 trillion or RM6.8 trillion) economy to expand 1.6% this year, down from an October forecast of 1.9%, and cut its 2022 estimate to 3.6% from 3.8%.

Inflation is seen staying elevated at 5.5%, up from October’s 4.8%.

It highlighted the need for the government to tighten fiscal policy and the Reserve Bank of Australia (RBA) to keep raising borrowing costs to cool price pressures.

“Restrictive macroeconomic policies are needed in the near term to mitigate strong domestic demand and address inflation,” the IMF said. “The pace of rate increases should continue to be data-dependent.”

Data last week showed inflation shot up to 7.8% in the fourth quarter, the fastest pace in 32 years, boosting bets for a 25-basis-point hike at the RBA’S first meeting of the year on Tuesday.

A senior RBA official said Wednesday that the consumer price index likely peaked last quarter.

The IMF said the current 3.1% cash rate is in “broadly neutral territory” and said that staff expect it to peak at around 3.85% in the second quarter.

Other data point to early signs of easing demand in response to the central bank’s three percentage points of hikes between May and December.

Retail sales were surprisingly weaker than forecast and employment growth is slowing too.