IMF lauds Australia's growth
The Executive Board of the International Monetary Fund (IMF) today concluded the Article IV consultation with Australia.
The Australian economy has been growing faster than most advanced countries, benefiting from its trade linkages with Asia, particularly China. Growth accelerated from 2¾ percent in the second half of 2011 to 4 percent in the first half of 2012, driven by private domestic demand and exports. However, growth has been uneven with mining-related sectors expanding strongly, in contrast with below-trend growth in other sectors. The high Australian dollar is weighing on trade-exposed manufacturing and tourism, which along with the uncertain global economic outlook is contributing to a broadly pessimistic mood, and weak investment growth outside the mining sector.
Australia's terms of trade peaked in 2011, pushing up the real effective exchange rate further and narrowing the current account deficit to 2¼ percent of GDP. By the second quarter of 2012, the terms of trade had fallen by around 10 percent, driven by declines in spot prices for iron ore and coking coal of 25 and 30 percent respectively. In recent months, however, the Australian dollar has remained high despite lower export commodity prices and the weaker global outlook, in part related to portfolio reallocations of large reserve holders toward Australian government debt.
Consumer Price Index (CPI) inflation has eased with underlying measures of inflation remaining near the middle of the 2-3 percent target band, largely due to the declining tradable goods prices associated with the appreciation of the exchange rate. Wage growth is also moderate, just marginally above its 10 year average in June 2012 with private sector wage growth faster than in the public sector. The labor market has performed well in international comparison, with a low unemployment rate at below 5½ percent.
The Reserve Bank of Australia (RBA) has lowered the policy rate by 150 basis points since November 2011, with the most recent cut in October 2012. Initially, when inflation moderated at the end 2011, the RBA moved to remove a mildly restrictive monetary policy stance. During 2012, as the outlook for the global economy deteriorated accompanied by a slightly weaker domestic outlook for 2013, and with projected inflation consistent with the target, the RBA shifted to an accommodative monetary policy stance. Interest rates for borrowers, a key indicator of the overall stance, are now slightly below their medium-term averages.
The 2011/12 underlying cash deficit came in at 3 percent of GDP, about 1½ percentage points higher than forecast during the 2011-12 Budget, due to both weaker receipts and higher expenditure.